Navigating Legalities and Comprehensive Guide to Setup an Entity in India

Navigating Legalities and Comprehensive Guide to Setup an Entity in India
Setting up an Entity in India – A Step-by-Step Guide
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India is one of the fastest-growing markets amongst the emerging economies with an average annual GDP growth of 6.5%. With a large population, comprehensive tax structure, low operational costs, and robust trade networks, India offers immense opportunities for foreign entities to set up their business. Also, with geopolitical stability and strong ties with the US, Europe, ASEAN, and the Middle East, India is a strategic choice for global investors looking to enter the Asian market.
Why Should You Consider Investing in India?
- Fastest Growing Economy
India is one of the largest and fastest-growing democracies in the world with a GDP growth for 2025-26 projected at 6.7% and with the economy expected to reach a valuation of ~US$5.3 trillion by 2027. Currently, at $3.72 trillion, India is the 5th largest economy in the world and the 3rd largest by purchasing power parity on a per capita basis. - Large Consumer Base
India has the 5th largest consumer market globally and will be 3rd largest by 2027, with a middle-class population of over 500 million. - Demographic Dividend
India is home to the largest adolescent and youth population in the world. Moreover, the country has a median age of 28.2 years and 65% of the population is below 35 years. - Growing Digital Economy
India ranks 2nd in global telecommunication, computer, and information services exports, with 954 million internet subscribers. Tech startups in India grew from 2,000 in 2014 to 31,000 in 2023, and EdTech became the leading sector. As per the Global Innovation Index (GII) 2024, the country ranked 39 out of 133 countries. - Double Tax Avoidance Agreements
Backed by a large network of tax treaties, 94 comprehensive DTAAs, and 8 limited DTAAs, the country’s favorable tax policies protect taxpayers from double taxation. - Free Trade Agreements
India is strengthening its trade ties and has signed agreements with Mauritius, UAE, and Australia. In March 2024, India signed TEPA with Switzerland, Iceland, Norway, and Liechtenstein, committing to invest US$100 billion and create 1 million jobs. India is negotiating an FTA with the UK, EU, Oman, Peru, and Sri Lanka, with priority on UK and EU agreements. - Foreign Direct Investments
The “Make in India” initiative has seen unprecedented FDI. In FY 2023-24, FDI inflows were US$70.95 billion, and equity inflows were US$44.42 billion.
Indian Government Incentives to Boost the Indian Economy
- Production-Linked Incentive (PLI) Schemes:
With an allocation of INR 1.97 trillion (approx. US$ 23.3 billion) for 14 production-linked sectors, the PLI program has attracted 12.50 trillion in investments and 9,50,000 jobs with Exports surpassing INR 4 trillion driven by sectors such as electronics, pharmaceuticals, and food processing. - GIFT City:
India’s first International Financial Services Centre (IFSC) in Gujarat aims to boost global financial services. providing financial incentives, regulatory freedom, and world-class infrastructure. - Semiconductor Ecosystem Development:
‘Semicon India’ aims to reduce reliance on imports with a significant investment of approximately INR 760 billion (US$8.99 billion) to decrease reliance on semiconductor imports and enhance self-sufficiency.- Startup India
- India is home to over 156,000 recognized startups (Ranks 3rd Globally in the number of startups) benefiting from favorable tax reforms and the abolition of angel tax.
- Tax Incentives: A 100 percent deduction on profits and gains (Section 80-IAC of the Income Tax Act, 1961) for three consecutive years within their first decade of operation.
- Investment Exemptions: Non-resident investments up to INR 100 million in startups are exempt from certain taxes.
- Unified Payments Interface (UPI):
India leads in digital payments, processing nearly 46% of global real-time transactions, with a total UPI transaction volume of INR 223 trillion (From January 2024 to November 2024). - Climate Change and Energy Transition (Economic Survey 2023-2024)
India has achieved 40% of its energy generation through non-fossil fuel sources, nine years ahead of the 2030 target. - Growth of Global Capability Centre (GCC) In India (Economic Survey 2023-2024)
Over 150 multinationals have set up their GCCs in India in the last couple of years. According to a PwC report, by 2028 India will have 2100 GCCs, with a market size of USD 90 billion.
Chart IV. 14: Remarkable Growth of GCCs In India
Government Initiatives for Economic Growth
Who Can Invest in India?
India allows citizens and entities of almost all countries to invest.
However, from April 2020 there are special restrictions for investors from countries that share a land border with India such as Pakistan, Afghanistan, Bangladesh, China, Nepal, Bhutan, and Myanmar. These investors need to get approval from the Government of India and security clearance from the Ministry of Home Affairs before they can do any corporate activities like company formation, appointment of directors, DIN, private placement, share transfer, or merger. Also, restrictions apply to entities from other countries having beneficiaries from the above-mentioned countries.
Sectors Permissible for Investments in India
Foreign investment in India is allowed in almost all sectors and in the remaining sectors it is allowed on an approval basis.
FDI can be made under two routes— Government Route and Automatic Route
- Government Route – Approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.
- Automatic Route – A Foreign Investor or Indian Company does not require any approval from the Government of India for the investment.
- Prohibited Sectors – Investment is not allowed in these sectors.
Establishing a Presence in India
When setting up in India foreign companies must choose the type of entity structure that suits their needs and business objectives to establish a strong presence in the Indian market.
A Foreign investor or Company can be set up as an unincorporated entity or an incorporated entity in India.
- Unincorporated Entities: Liaison Office, Branch Office, Project Office.
- Incorporated Entities: Private Limited Companies, Limited Liability Partnerships, Joint Ventures.
Graphic from © India Briefing
A. Setting up Unincorporated Entities – For Exploring the Markets in India
A Foreign Company can use Unincorporated Entities to do business in India via ‘offices’ of certain types.
Structure | India Liaison Office/ Representative Office | India Branch Office | India Project Office |
---|---|---|---|
Role/Purpose | A tool to explore market opportunities in India and promote the parent company’s business activities | • Extension of a Parent Company • Should be engaged in the activity in which the Parent Company is engaged |
A Project Office (PO) is normally established to manage large-scale projects like major construction, civil engineering, and infrastructure development. |
Eligibility/Prerequisite/ Criteria for Setup | Applicant Foreign entity should have:
|
Applicant Foreign entity should have:
|
• FC should have secured a contract to execute a project in India from an Indian company and • The Project is funded by: a. Inward remittances from abroad or b. International Financing Agency (Eg: World Bank or IMF) or  c. Indian entity awarding the contract has availed a term loan from a PFI or a Bank in India for funding the project. |
Time Frame for Incorporation | ~ 1.5 Months | ~ 2 Months | Registration: ~15 days. Set up PO within 6 months of receipt of the approval letter. |
Prohibited Business Activity | Not allowed to undertake any business activity in India. Only acts as a communication channel | Manufacturing and Processing Activities, Retail or Trading Activities in India | Activities other than those related to the specific project |
Validity | ~Generally, for 3 years (Renewal of registration – Permissible) | No specific time frame, generally 2-3 years. | As per the tenure of the project. |
Structure | India Liaison Office/ Representative Office | Â India Branch Office | Â India Project Office |
---|---|---|---|
Permissible Activities | 1. Representing Parent Company (PC) in India 2. Promoting Export and Import (EXIM) from/to India and technical/ financial collaborations. 4. Communication channel between the Parent Company (PC) and Indian Company (IC). |
1. Export/Import of Goods 2. Rendering Professional and Consultancy Services 3. Research in areas in which the PC is engaged 4. IT and Software Development in India 5. Technical and Financial Collaboration between PC and IC 6. Acting as a buying/ selling agent of PC in India. |
Limited to the activity relating to and incidental to the project |
Revenue | Cannot earn any income in India. | Can earn only from activities allowed by the RBI. |
– |
Expenses to be met from | Inward remittances from the Parent Company |
Inward remittances from the Parent Company or |
Inward remittances from the Parent Company |
Tax Rate | Not subject to taxation as no commercial activity allowed. |
~35% depending on income. (Budget 2024) |
~35% (Budget 2024)Â
|
Remittances back to HO | Not Applicable as they cannot earn any Income in India. | Freely repatriable after taxes are paid and submission of requisite documents. |
Intermittent remittances are permitted subject to the satisfaction of Authorized Dealer Category 1 Bank. |
Incorp Views | A Foreign Liaison Office helps global companies make their mark in India and connect with local businesses.Â
It offers a convenient way for foreign companies to step into the Indian market without the need to create a complete local branch office. |
When a Foreign Company establishes a Branch Office in India, it operates as an extension of the foreign entity without forming a new legal structure.Â
However, a Branch Office is restricted in the scope of activities it can undertake and is subject to a high-income tax rate.
|
Foreign companies engaged in turnkey construction or installation usually set up a project office for their operations in India.
 A project office is a branch office set up with the specific purpose of executing a particular project. |
Common Conditions | |||
---|---|---|---|
Regulatory framework | The FEMA Regulations and Companies Act 2013 regulates the set-up operations and closure of LO/ BO/ POs. Also, all three entities require RBI approval to be established. | ||
Indian Representative | Parent Company must appoint an Indian Resident with a valid PAN as a local authorized representative (Mandatory Requirement) | ||
Annual filing | File Annual Activity Certificates (AAC) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year | ||
Net Worth | As per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name. | ||
Entity Name | Must be the same as the Parent Company. | ||
Bank Account | All three forms of entities are required to maintain a Bank account in India. | ||
Liabilities | Parent Company’s liability is unlimited for all acts and omission of LO/BO/PO |
B. Setting Up Incorporated Entities – For Expanding in India
A Foreign Company can incorporate a separate legal entity to do business in India in the form of:
Structure | Limited Liability Partnership | Private Limited Company/ Wholly Owned Subsidiary | |
---|---|---|---|
Governed by | The Limited Liability Partnership Act 2008 | The Companies Act 2013 | |
Charter Documents | LLP Agreement | Memorandum of Association and
Articles of Association |
|
Permissible
 Activities |
More suited for the Service sector. | All types of business activities are permitted, such as in the Manufacturing/ Marketing/ Service sectors. | |
Ownership and Management | Min 2 Designated Partners (DP)* | Min 2 Directors and Min 2 Shareholders* | |
Indian Representative (Mandatory Requirement) | Mandatory to have at least 1 DP who is an Indian Resident.
(i.e.: Residing in India for 121 days or more during the Financial Year) |
Mandatory to have at least 1 Director who is an Indian Resident.
(i.e.: Residing in India for 183 days or more during the Financial Year) |
|
Annual Compliances | • LLP is not mandatorily required to conduct Board meetings or AGM. • Statutory audit is not required if the turnover is below INR 4 MN. |
• 4 Board Meetings are mandatory in the Calendar year • AGM within 6 months from the end of the Financial Year. • Companies must conduct a statutory audit. |
|
Foreign Investments (FDI) | Foreign investments are allowed only where 100% FDI is allowed by automatic route. | Foreign investments are allowed subject to FDI Policy. | |
Funding | LLPs raise funds through contributions from Partners and loans from Banks and Financial Institutions. | Companies can raise funds from angel investors and venture capitalists and also have an option for raising funds via debt. | |
Winding up | Easy | Difficult | |
Punishment for Default | Mild to Moderate | High | |
Other Statutory Compliances | Medium | High | |
Taxation Rates | 30% | ~25 to 30%* |
Surcharge and Health and Education Cess is levied on the amount of income tax.
Common Points | ||
---|---|---|
Entity Name |
|
|
Incorporation Formalities |
|
|
Validity | Perpetual Succession or will continue until its dissolution/as stated in the LLP Agreement. | |
Management* | Even a Body corporate can be a Shareholder/Designated Partner | |
Time Frame for Incorporation | ~ 1 Month | |
Staff hiring | Can Hire Local and Foreign Staff. |
Tax Rates on Repatriation of Funds
Particulars | Tax Rate | Taxable in the hands of |
---|---|---|
Dividend | 10.00% | Recipient – Resident shareholder |
Dividend | 20.00% * | Recipient – Non-resident Shareholder |
Royalties | 20.00% * | Recipient – Non-residents |
Fees for Technical Services | 20.00% * | Recipient – Non-residents |
Capital Gains Tax | Different Tax Rate | CG tax will be payable on the gains arising out of the share valuation at the time of winding up/closure of the Company/ WoS.  |
Tax on BuybackÂ
(w.e.f 1st October 2024 ) |
Taxed as per the recipient investor’s respective slab rate. |
|
Tax on Slump Sale | 12.50%
(w.e.f 1st October 2024) |
In case the Business undertaking is held for more than 36 months and transfers its business undertaking for a lump sum consideration, the gains from the Slump Sale will be long-term in nature and the tax rate will be as mentioned alongside. |
*Subject to rates mentioned in the Double Tax Treaty Agreement, whichever is beneficial to the Non-resident individual.
Tax Rates on Various Financial Activities
Conclusion
Investing in India provides businesses with great opportunities due to the nation’s economic growth, large and young population, government support, low labor cost, and positive demographics. The government has done many reforms like the Bankruptcy Code, Corporate Tax Cuts, and Relaxed Foreign Ownership rules which have made business operations smoother in the country. With the country’s growth story and potential, India is a great addition to the business’s global portfolio.
Why Choose InCorp Global?
Starting a business in India can be tough and time-consuming. At InCorp, the experienced consultants are here to guide you with the complexities of setting up the business, meet all the regulatory requirements, and discover new opportunities. InCorp’s objective is to make your business entry into India as smooth as possible and help the business grow.
Please contact us at info@incorpadvisory.in or (+91) 77380 66622.
Authored by:
Yash Mehta | India Entry
FAQ:
- Mandatory registration with the Ministry of Corporate Affairs after RBI approval.
- Get a PAN and TAN for the LO
- Can only open a non-interest-bearing INR current account in India.
- Foreign Insurance Companies and Banks need IRDA and RBI approval to set up a LO in India.
The choice between Company and LLP structure depends on the business nature, sector, tax planning, and compliance preferences.
- Foreign Direct Investment Regulations
- FDI is allowed in LLPs in sectors where 100% FDI is allowed under automatic route
- FDI is not allowed in Prohibited Sectors like aviation, financial services, private security, etc.
- Investment Structuring
- FDI in LLP can be through capital contribution or profit share acquisition/transfer.
- Foreign partners can give debt to the LLP they invested in.
- Tax Considerations
- LLPs have more tax benefits than companies as partner profits are not taxed in their hands whereas dividends paid by a company are taxed in the hands of the shareholders.
- 20% tax saving for foreign shareholders of companies.
- However, LLPs are taxed at 30-34% in India whereas companies are taxed at 25-28%. But this can be used to an FI’s advantage depending on his tax jurisdiction.
- It will benefit foreign investors as they can set off the tax paid on LLP’s profits in India against their collective tax liability in their home country.
- Compliance Formalities
- LLPs have less compliances like filing of partnership deeds, annual returns, and a statement of account compared to Companies.
- Other Considerations
- LLPs offer a mix of flexibility of partnership and limited liability.
- LLPs are for small businesses and professionals, and companies are for complex operations.
- Key differences in compliances between an LLP and a Company in India
LLPs have lesser compliance than companies.
Minimum Capital Requirement
- There is no minimum Paid-Up Capital required to form a Company or LLP.
- In the case of LLP partners are required to make some investment to form an LLP.
- Investment/contribution of a partner can be in the form of tangible, moveable, immovable, and/or intangible property and/or any other benefit to the LLP.
 - Statutory Audit
- Companies are required to get statutory audits regardless of turnover or capital.
- For LLPs statutory audit is not required if their annual turnover is less than ₹40 Lakh (INR 4 Million) or capital contribution is less than ₹25 Lakh (INR 2.5 Million).
- Â Annual Filings with MCA
- Companies are required to file annual returns (MGT-7/7A) and financial statements (AOC-4).
- LLPs are required to file annual statements of accounts and solvency (8) and annual returns (11).
- Fines and Penalties
- Companies can be penalized more for noncompliance with MCA regulations.
- A flat fee of INR 100 per day is levied on LLP if noncompliance continues.
-Â Meetings
- Companies must hold at least 4 (Four) board meetings in a financial year with a gap of not more than 120 days between two board meetings.
- Directors must mandatorily attend at least 1 (One) Board Meeting each Financial Year.
- All shareholders must attend one mandatory meeting in a year (ie: Annual General Meeting.
- LLPs are not required to have any mandatory meeting requirements.
Companies have an edge over LLPs in terms of funding. They can access more funding sources, especially equity investments from investors which LLPs can’t.
Equity Funding
- Companies can raise funds by issuing shares to investors like angel investors, venture capitalists, and the public via an Initial Public Offering (IPO).
- Funding can be done through equity, debt, and convertible instruments.
- As there is no concept of equity shareholding in LLP, it cannot raise funds by issuing shares to investors.
 Debt Funding
- Companies can raise funds from Banks, NBFCs, and other Financial Institutions or by issuing debentures.
- LLPs can take loans from banks and financial institutions.
In India, financial reporting requirements for different types of entities are governed by relevant statutes.Â
Types of entities | Is the preparation of financial statements mandatory? | Relevant statute | Remarks |
---|---|---|---|
Proprietorship | Yes | Income Tax Act, 1961 | Applicable only if the turnover exceeds the limits specified under the relevant statute |
Partnership Firm | Yes | Income Tax Act, 1961 | |
Limited Liability Partnership (LLP) | Yes | Limited Liability Partnership Act, 2008 | Only if the turnover exceeds the limits specified under the relevant statute |
Listed Public Limited Company | Yes | Companies Act, 2013. Securities and Exchange Board of India (SEBI) Guidelines | In case the company falls under a special statute, then the requirements of such special statute shall prevail |
Unlisted Public Company | Yes | Companies Act 2013 | |
Private Company | Yes | Companies Act,2013 | |
Liaison Office/ Branch Office/ Project Office | Yes | Companies Act, 2013 Foreign Exchange Management Act Insurance Regulatory and Development Act 1999 | Six months from the end of the financial year. |
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