This is the second post in a series of posts intended to provide a high level overview of the business, structural, tax, employment and legal considerations for conducting business in India, written in collaboration with Manish Mishra, Executive Director of Meritas Indian member firm Khaitan & Co.
By no means do our posts address every aspect and consideration for conducting or seeking to conduct business in India. To address any specific business structure, joint venture, employment or consulting relationship, tax issue or dispute, we recommend that you contact your legal or tax advisor. The information contained in this blog is provided on an ‘as is’ basis on the date of publication.
Irrespective of the form or the structure adopted to conduct business in India, an entity may be required to obtain following key registrations before commencing its business in India.
- Permanent Account Number (“PAN”): PAN is issued by the Income Tax authorities, and is the unique tax identity number of an assessee. Having a valid PAN is a pre-requisite for filing tax returns, engage in financial transactions and open bank accounts in India
- Tax Deduction Account Number (“TAN”): TAN is required to make a tax deduction at source (‘TDS’) and filing a quarterly TDS return
- Importer Exporter Code (“IEC”): IEC is required to undertake import or export of goods in India and is issued by the Director General of Foreign Trade (“DGFT”)
- Value Added Tax (“VAT”) and Central Sales Tax (“CST”) Registrations: VAT & CST registrations are required to undertake sale and purchase of goods in India. The VAT registration is required for sale of goods within the same state whereas, the CST registration is required to undertake sale of goods from one state to another
- Central Excise Registration: Central Excise registration is required where the company undertakes any activity which amount to manufacture or production of goods in India
- Service Tax Registration: A Service tax registration would be required in case the Company provides any taxable service in India or it receives any taxable services from outside of India
While most of the above registrations may take as long as seven to ten days from the date of filing, you should know that obtaining a PAN is mandatory to engage in financial transactions and hence, as a practical matter, mandatory to conduct business in India. Further, having a PAN is a pre-requisite for obtaining other registrations mentioned above. However, your need to obtain other registrations may occur only in the event that your business becomes engaged in a specific activity. For instance, central excise registration is required only in case a person is engaged in a manufacturing activity.
Liability Considerations – Indian Law
Presence of U.S. company in India
Depending upon the form of business structure chosen, the U.S. company may be “present” in India for all purposes under Indian law or may be “present” for very limited or no purposes. A sole proprietorship, partnership, branch office, or liaison office may be “present” in India as it is a direct extension of its U.S. company “parent.”
Jurisdiction of U.S. company, Employees and Assets in India
To the extent, a U.S. company establishes a subsidiary rather than a branch or liaison office, the U.S. company will not be present in India or directly subject to its jurisdiction.
U.S. company Subject to India Taxes
The Income Tax Act of 1961 (“ITA”) governs income tax liability in India. Different rules and tax rates apply to different categories of income, such as salary, profits and gains of businesses or professions, capital gains, and income from other sources. Capital gains are taxed at differential rates.
Some important aspects that should be considered in that regard are:
- India’s taxation system is both “residence based” and “source based.”
- In general, residents are taxed on their world wide income.
- Non-residents are taxed on income accruing in or sourced in India, or income earned from any Indian source or income received in India.
- India and the United States are parties to the US – India Tax Treaty and Protocol (the “Treaty”).
- With respect to nonresident companies or foreign companies investing in India, the provisions of the ITA apply only to the extent that they are more beneficial than the Treaty.
- Credits for foreign taxes paid in India are available to US companies conducting branch or liaison activities in India under the Treaty.
We will explore the impact of and correlation of the U.S. and Indian taxing structures and the impact of the Treaty on planning for the most effective tax structure for a U.S. company to conduct business in India and how profits may be repatriated from India to the US in our next entry.