India has emerged as one of the world’s most vibrant markets, outpacing growth expectations over the past few years and becoming a hub of business opportunity.
India’s expanding business ecosystem, skilled workforce, digital infrastructure and government facilitation measures offer foreign investors significant opportunities to establish and scale their operations.
However, once a foreign business decides to enter India, procedural and compliance considerations take centre stage.
Getting this right from the outset saves significant time, cost, and rework down the line.
Below is a set of key questions and considerations every foreign investor should work through at the inception stage.
1. Company Business Model
The first step is to understand the Indian market and clearly define how the business proposes to operate in India.
These may include market research, sales, distribution, manufacturing, service delivery, procurement, product development or customer support.
The proposed activities influence the permissible entry vehicle, tax exposure, regulatory approvals, staffing requirements and funding structure.
2. Permitted Sector for Foreign Investment
This determines which route the company’s sector falls under:
- Automatic Route
- Government Route
- Prohibited sectors
The applicable sectoral cap, entry route and associated conditions should be examined before committing the investment.
3. Entry Vehicle
Common structures for entering the Indian market include:
- Wholly owned Subsidiary company
- Joint venture Company
- Branch office
- Liaison office
- Project office
- Limited Liability Partnership – Where permitted
- Distributor, agent or contractual agreement
The appropriate structure should be selected after considering the proposed activities, ownership requirements, tax implications, operational flexibility and long-term business objectives.
4. Permanent Establishment
It’s important to understand Permanent Establishment (PE) status and refer to the applicable Double Taxation Avoidance Agreement (DTAA) for its definition.
PE status affects taxation in India and can also carry tax implications in the home country.
Caution: A business can have a permanent establishment in India prior to registering an entity if its activity creates a Permanent Establishment under Indian Laws.
5. Initial Funding
Capital investment into India requires compliance with:
- FEMA (Foreign Exchange Management Act)
- The Companies Act
The appropriate funding structure depends on the nature of the business, capital requirements, repayment expectations and applicable FEMA conditions. Possible routes may include:
- Equity Capital
- Compulsorily convertible instruments
- External Commercial Borrowings, where permitted
- Parent Company support in the form of reimbursement – Subject to FEMA requirements and applicable taxes
- Trade Credit and commercial arrangements
6. Taxation
Key areas to address include:
- Tax obligations in the home country
- Tax obligations in India
- Benefits available under the DTAA
Companies must also stay current on Transfer Pricing regulations, which apply to related-party transactions between the Indian entity and the foreign (home) company — including funding, sales, purchases, and services.
GST registration and ongoing compliance requirements should be assessed based on the entity’s activities, turnover, location and other applicable statutory conditions.
7. Cross-Border Payments
Inbound and outbound fund movement is subject to statutory procedures and compliance requirements, including those under FEMA and Income Tax regulations.
8. Registration in India
Following incorporation, the company may require tax, GST, import-export, employment, local and sector-specific registrations depending on its activities, turnover, location and workforce. These requirements should be mapped before commercial operations commence.
9. Government Incentives
The Indian Government offers various incentives to encourage investment, manufacturing, employment and exports.
Foreign investors should assess whether their proposed sector, investment size and location qualify for benefits such as:
- Production – Linked Incentives
- Location Based Incentives
- Capital Subsidies
- State Tax benefits or reimbursements
- Stamp Duty Concessions
- Employment Support in the form of Reimbursement or Deductions
Since several incentives require an application or approval before the investment is committed, eligibility should be evaluated at the planning stage.
10. Planning Is Everything
Registering and setting up a business in India requires careful planning from day one. Documentation and registration take time, and many steps depend on the completion of the one before it.
For example, funds cannot be transferred to India until a bank account is opened.
Opening a bank account requires company registration.
Company registration requires a specific set of documents prepared in India, alongside Apostilled documents from the investor’s home country.
Getting the sequencing and compliance right from the start is the difference between a smooth market entry and a costly delay.
In our next article, we will explain how a foreign investor can register a company in India, the documents required from the overseas parent and foreign directors, and the practical matters that should be planned in advance.
This article provides a general overview and does not constitute legal, tax or regulatory advice. Applicable requirements may vary depending on the investor, sector, proposed activities and transaction structure.
Planning to enter the Indian market?
Our advisory team can assist with entity structuring, taxation, FEMA, transfer pricing and ongoing regulatory compliance.
For an initial discussion, write to us at rajnish@sgaindia.co.in.
About the Author
CA Rajnish Shukla is the Founder Partner of M/s Shukla Gupta & Arora – Chartered Accountants, with over two decades of experience in taxation, regulatory compliance and business advisory. He advises foreign-owned and internationally operating businesses on India market entry, entity structuring, taxation, FEMA, transfer pricing and ongoing compliance.