Starting a business in India

Here’s a practical guide from Enterprise Singapore and our knowledge partner RSM on the nuts and bolts of setting up shop in India. It covers:

  • Business structure
    Which business structure to use?

    To do business in India, one of the first things to consider is your business structure. Different regulations apply depending on your business structure and activities.

    Here are six business structures to consider depending on the nature of your business:

    • Company

      If you plan to invest in India for the long term, consider setting up a company.

      Choose between setting up a private limited company or a public limited company. Either way, you can set up your company as a wholly owned subsidiary or a joint venture. Each of them is a legal entity on its own.

      India regulates companies by incorporating and governing them under its Companies Act, 2013. In addition, India’s Foreign Direct Investment (FDI) policy may set restrictions for companies in selected sectors such as multi-brand retail trade, public sector banks, infrastructure, print and media sectors. You may need to set up your company as a joint venture if you wish to do business in industries with such restrictions.

    • Partnership Firm

      You can set up a partnership firm to run the business with partners. You and your partners will share the profits from the business according to your agreement in a Partnership Deed, which you can register with the Registrar of Firms.

      The Indian Partnership Act, 1932 lays down the rights and obligations of partners, retirement and admission of partners, dissolution of the company and related aspects. According to the Indian Companies Act, 2013, you may not have more than 50 persons partnering in a business.

    • Limited Liability Partnership

      To combine the merits of a company and a partnership, you can set up a limited liability partnership (LLP). LLPs are rapidly emerging as an alternative to companies and partnership firms, both traditionally more popular.

      LLP is a hybrid business entity. It gives you certain benefits, such as limited liability and greater tax efficiency. You can decide on any internal business structure, so long as there is mutual agreement among partners.

      You may partner anyone, or another business entity, such as another foreign company or another local/ foreign LLP to set up an LLP. Do note that an LLP needs at least two designated individual partners and at least one of them must be a resident in India.

      No tax is levied on distribution of profits as dividends to partners, unlike in the case of a company where Dividend Distribution Tax (“DDT”) is applicable on repatriation. FDI in LLPs are permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed without any performance-linked conditions.

    • Liaison Office

      One common practice among foreign companies is to set up a liaison office or representative office in India as a first step into the Indian market.

      A liaison office generally performs preparatory and auxiliary activities. It cannot carry out any commercial activity and is not considered a permanent establishment in the country.

      You need approval from the Reserve Bank of India (RBI) to open a liaison office.

    • Project Office

      If you secure a contract from an Indian company and need to operate in India to fulfil the contract, you can set up a project office to manage the project. Depending on the nature of your contract, you may need RBI’s approval to run a project office in India for the duration of the project.

    • Branch Office

      Another option is to open a branch office in India. Under the regulatory laws, your branch office can only carry on certain specified activities. These include export or import of goods, providing services in information technology, or acting as a buying or selling agent in India.

      Since a branch office is a profit-making foreign enterprise in India, do note that it falls into the higher tax bracket for foreign companies. You also need RBI’s approval to set up a branch office.

    How long does it take to register my business in India?

    Set aside enough time to register your business, which may take less than a month, and up to four months:

    • Company – less than one month
    • Limited liability partnership – less than one month
    • Branch Office – around three to four months
    • Project Office – three months
    • Liaison Office – three months
  • Directors and shareholders
    How many directors do I need?

    It differs for private and public companies:

    • Minimum
      • A private company needs at least two directors
      • A public company needs at least three directors
    • Maximum
      • 15 directors

    You may increase the maximum number of directors by passing a special resolution.

    Do I need a minimum number of resident directors?

    Yes, at least one of your directors must be a resident who has stayed in India for at least 182 days in the previous financial year.

    Any restrictions on who I can appoint as a director?

    A director in your company does not need any minimum qualification.

    However, there are age restrictions. You cannot appoint anyone who is younger than 25 years old or above 70 years old as your managing director or full-time director. You need to pass a special resolution before appointing anyone who is 70 years old.

    Can I appoint only foreigners as directors to my board?

    Yes, foreigners can make up your entire board. However, at least one director must have stayed in India for at least 182 days in the previous financial year.

    Can a company in India be wholly-owned by foreigners? Do I need a minimum percentage of local shareholders?

    Most sectors in India allow a company that is fully owned by foreigners to invest.

    However, specific sectors set maximum limits for foreign ownership. Some sectors do not allow foreign investment at all.

    You can refer to India’s consolidated policy on Foreign Direct Investment for details.

    How many shareholders do I need to set up a company?

    It depends on your business structure:

    • Private Limited Company – minimum two shareholders
    • Public Limited Company – minimum seven shareholders
  • Business activities
    Do I need approval from the local authorities before my company operates?

    In most sectors, you can start operating without prior approval.

    You need prior government approval if you invest beyond the respective set limits in these sectors:

    • Civil aviation (scheduled air transport/ domestic scheduled passenger airline & regional air transport service)
    • Banking in the private sector
    • Banks in the public sector
    • Defence sector
    • Satellite establishment and operations
    • Pharmaceuticals – brown field projects   
    • Print media
    • Broadcasting
    • Petroleum and natural gas
    • Multi-brand retail trading
    • Infrastructure companies in securities market
    • Pension
    • Power exchange
    • Commodities spot exchange

    Are there business activities closed to foreign companies?

    The prohibited sectors are:

    • Lottery business (including government or private lottery) and online lotteries etc.
    • Gambling and betting (including casinos)
    • Foreign technology collaboration in any form, including licensing for franchise, trademark, brand name and management contract for lottery business and gambling and betting activities
    • Chit funds
    • Nidhi companies
    • Trading in transferable development rights
    • Real estate business or construction of farm house. However, you can take part in developing townships, building residential or commercial premises, roads or bridges and Real Estate Investment Trusts (REIT) registered and regulated under SEBI (REITs) Regulations, 2014.
    • Manufacturing of cigars, cheroots, cigarillos and cigarettes, tobacco or tobacco substitutes
    • Activities or sectors closed to private sector investment, for example, atomic energy and railway operations
  • Licenses
    When must I apply for a licence?

    You need a licence to carry out industrial activities involving:

    • Electronic aerospace and defence equipment
    • Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose and matches
    • Cigars and cigarettes with tobacco and manufactured tobacco substitutes
    • Specific hazardous chemicals, such as:
      • Hydrocyanic acid and its derivatives
      • Phosgene and its derivatives
      • Isocyanates and disocyanates of hydrocarbon not specified elsewhere, such as methyl isocynate

    Typically, do I apply for licences before or after setting up my company?

    After setting up your company, because you need to apply for the licence in the name of your company. You also need to submit a copy of your certificate of incorporation when you apply.

    Do I renew my licences each year?

    Industrial licenses are valid for different periods. Generally, each licence is valid for 10 to 20 years. You only need to renew them after they expire.

    Should I display the business licence prominently at my business location?

    There’s no need to display the business licence in most cases but it is a good practice to do so.

    Take note that certain licenses need to be prominently displayed, such as the Shops and Establishment Licence.

  • Share capital and capital contribution
    What is the minimum share capital or investment capital needed to set up a company?

    There is no minimum amount.

    Do I need approval from the local authorities to increase my share capital or investment capital? How long does approval take?

    You don’t need approval to increase your capital, but you must report the increase to the authorities.

    If you are increasing share capital by issuing new shares to non-residents, please follow RBI’s rules.

    What is the typical share capital requirement for an investment holding and trading company?

    There is no typical share capital requirement.

    What is the common unit issue price per share?

    It varies. For example, it can be INR 1 or INR 100 (S$2.09) or any other value.

    Generally, companies issue equity shares (common stock) at a face value of INR 10 per share and preference shares (preferred stock) at a face value of INR 100 per share.

    Can I issue shares in a currency other than Indian Rupee?

    You can only issue shares in Indian Rupee.

    Any restrictions on bringing capital out of India?

    No restrictions but you must pay withholding tax first if you have to.

  • Banking
    Do I need a separate bank account to deposit capital?
    It is not necessary. Your company may use a single bank account to deposit capital and carry out other business transactions.

    How long does it take to set up a corporate bank account?
    It usually takes two to three days after you have submitted all the documents needed.

    Do I need to keep a minimum amount as capital in my bank account at all times? Or can my company use the entire amount for business activities?
    Most banks do not need you to keep a minimum amount. Do check with your bank as the rules may be different across banks and types of accounts.

    Can RSM recommend and help my company open bank accounts in India?
    Yes, they can.

  • Taxes

    What is the current corporate tax rate?
    The following table summarises the current tax rates:

    What it is Tax benefits
    Tax Exemption for SEZ Exports – For companies located in a Special Economic Zone (SEZ) and produces goods or services for export Corporate tax exemption on the profits derived. 100% in the first five years and 50% from the sixth year onwards.
    Additional investment allowance – For companies producing in any notified backward area 15% of the cost of new assets.
    Deduction of additional wages for new employees – For all taxpayers 30% of the cost of a new employee.
    Lower income tax rate for new manufacturing companies Companies pay 25% income tax.
    Tax exemption for technology start-ups 100% tax exemption for three consecutive years out of the first seven.

    Any special grants for foreign companies or for specific industries which the local government encourages?

    There are no tax benefits that only apply to foreign-owned companies.

    What is the current corporate tax rate?

    The corporate tax rate for FY 2018-19 is:

    • 25% or 30% for companies, partnerships and limited liability partnerships
    • 40% for branch offices and project offices

    A special tax called the Minimum Alternate Tax, which is 18.5% of book profits, applies to your company if the income tax payable is less than 18.5% of your book profits.

    When and how do I pay corporate tax? Is this paid annually or monthly?

    You need to pay income tax on a quarterly basis as advance tax for income earned during a financial year (1 April to 31 March). The due dates for payment of advance tax and the amounts to pay are:

    Due Date Amount Payable
    On or before 15 June Not less than 15% of advance tax payable
    On or before 15 September Not less than 45% of advance tax payable, less earlier installment
    On or before 15 December Not less than 75% of advance tax payable, less earlier installments
    On or before 15 March Whole of advance tax payable, less earlier installments

    The remaining tax, if any, has to be paid by company as a self-assessment tax on or before the due date of filing return of Income.

    Do I need to pay tax when I send dividends back to Singapore?
    There is no withholding tax when you repatriate dividends. This is because your company would have paid a Dividend Distribution Tax of 20.5553% when paying out dividends.

    What are the withholding tax rates on interest, dividends and royalties?
    The withholding tax rates on payments to non-residents (unless reduced by a particular tax treaty) are as follows:

    Nature of payment Withholding tax rate (%) [plus applicable surcharge and education cess]
    Interest on foreign currency (subject to conditions) 5
    Interest on money borrowed in foreign currency under a loan agreement or by way of long-term infrastructure bonds (or rupee denominated bonds) 5
    Interest on investment in long-term infrastructure bonds issued by Indian company (rupee denominated bonds or government security) 5
    Non-specified kind of interest 20
    Royalty 10
    Fees for technical fees 10
    Long-term capital gains on listed equity shares/units of equity oriented funds/units of business trust 10
    Long-term capital gains on unlisted securities or shares of a closely held company 10
    Income by way of winning horse races 30
    Short-term capital gains on listed equity shares / equity oriented mutual fund 15
    Other income 40

    Any value-added tax or goods & services tax in India? If so, what is the current rate?
    Yes, India started collecting Goods and Services Tax from 1 July 2017. The tax rate varies from 0% to 28%, depending on the goods and services you buy.

    Are there any tax treaties between India and Singapore?
    Yes, there is a tax treaty between India and Singapore to avoid double taxation of income.

  • Human resource
    What basic employment benefits must I give to my employees?
    In general, you need to give your employees bonus, gratuity and paid leave, and contribute to their pension or provident fund. Different employment-related laws protect these employee benefits.

    Do I need to pay taxes or social security contributions for employees?
    Yes, you need to contribute to the provident fund and pension fund of your employees. In addition, you have to deduct withholding tax and professional tax on the behalf of your employees.

    India does not have a Social Security Agreement with Singapore to prevent dual contribution of social security in the country of origin and destination when you transfer your employee between India and Singapore.

    If I send a Singaporean employee to work in India for less than a year, does the employee need a work pass?
    Yes, you need to apply for a work pass or employment visa for your Singaporean employee to work in India, regardless of the duration of work. The nature of work affects how long the visa is valid and the type of visa the employee gets.

    Your employee needs to bring along these documents when he applies for the visa:
    • Passport with six months validity, and a photocopy of the passport
    • Passport-sized photographs
    • Completed online form
    • Appointment letter
    • Contract letter
    • Resume (CV) of applicant
    • Organisation registration
    • Tax liability letter
    • Project details
    • Sponsor letter from organisation in India
    • Justification letter from employer

    In general, it takes three days to process an application from a Singapore citizen and six days for others.

    Must I have a physical office in India? Can I use another business’ address or a virtual office address?
    You need a registered business address if your company is incorporated in India.

    Your place of business and business address can be:
    • A rented premise
    • An office of another business
    • A virtual office in India

    You can also use a residential property as your business address, with the owner’s permission.