Why do business in India?
India is ranked 63 out of 190 economies in the ease of doing business, according to the latest ratings published by the World Bank.
India offers enormous opportunities for businesses who have a strategic footprint to expand internationally. However, India is a large and complex market and it should not be seen as one market, but a series of interconnected regional markets where the legislative and investment climate may change from one state to another.
India may be easy to enter but you need to ensure you follow compliance and regulatory guidelines which is why UnaTerra is here to help you navigate.
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World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
How to set up payroll in India
There are many rules and regulations before you can do business in India. You will need to complete this checklist before looking to recruit a workforce:
- Register your company name, ensuring that it is available in India.
- Obtain a Digital Signature Certificate (DSC). This acts as an online signature for financial matters in India.
- Gain a Director Identification Number (DIN) for all directors in your business.
- Apply for an Incorporation Certificate.
- Create a company seal and stamp.
- Obtain a Permanent Account Number (PAN) and a Tax Account Number (TAN).
- Gain a trading license from the local State/Municipal Inspector under the Shops and Establishment Act.
- Apply for Goods and Service Tax (GST) registration.
- Obtain a Profession Tax Certificate from the State Profession Tax Office.
- Enrol with the Employee Provident Fund Organization (EPFO) and gain an Establishment Code Number (ECN).
Only once you have completed all of these steps can you open a bank account in India. This is essential for paying your staff. You cannot run payroll from an international bank account.
You will be responsible for withholding income tax from your employees. Salaries below 249,000 Rupees are non-taxable. Taxable income in India falls under three brackets:
- Salary of 250,000 to 499,000 Rupees – 5% income tax rate
- Salary of 500,000 to 1,000,000 Rupees – 20% income tax rate plus 12,500 Rupees
- Salary over 1,000,000 Rupees – 30% income tax rate plus 112,500 Rupees
These taxes are withheld from a salary and filed with the Income Tax Department of the Indian government.
Employers also need to pay into an Employee Pension Scheme (EPS). This charge is 8.3% of a salary, though the payment is capped at 1,250 Rupees per month. As an employer, you must also pay into health insurance policies.
If your business hires more than 20 staff, you must make an additional 12% contribution to any employee’s salary. This is paid into an Employee Provident Fund (EPF).
Overall, expect the expense of hiring in India to be up to 1.3 times the employee’s annual salary. Ensure this is factored into your financial calculations.
Indian employment law and HR considerations
Indian employment law is less stringent than in many countries. In essence, the contract is king when it comes to employer and employee relations. This gives a business owner a greater degree of power and control than perhaps they are used to.
However, as is to be expected, there are particular rights that apply to all Indian employees. These include:
- Employee payments into the state pension
- Medical insurance for employees and their families
- Unemployment insurance – part of the Employee State Insurance (ESI) Act
- Work-related injury insurance
Maternity leave is typically set at between 12 and 26 weeks of full pay. How long is allocated usually depends on the size of the family in question. You may notice that we mentioned maternity leave – paternity leave is not a legal requirement in India. However, many companies will offer 15 days of leave on full pay to new fathers.
Terminating contracts is often a civil matter between employer and employee. As a business, you can waive any right to a notice period in exchange for the opportunity to terminate employment at will. However, if you neglect to determine a notice period, an employee can reasonably expect 30 days of notice of termination – or payment of a month’s salary in lieu of this notice.
Setting up a subsidiary entity in India
Upon deciding to set up in India, you’ll need to make a critical decision. Will you open a branch of your existing global business, or set up a new, unique Indian business?
A branch is best considered a temporary solution to trading in India. It’s an ideal way to learn about the Indian business climate without commitment. In the longer term, however, operating as a branch of a foreign business may feel restrictive.
To qualify to open a branch, your business must be registered outside India. The branch in India must have a net worth of at least £75,000 or more, and you’ll need to prove that the parent company has been turning a profit for the past five years.
If your business meets the appropriate criteria, application to open a branch is made through the Reserve Bank of India (RBI). This application will be approved or rejected according to the Foreign Exchange Management Act (FEMA) of 1999. If you wish to open multiple branches in different locations throughout India, every application must be made independently. There is a lot of paperwork each time, so consider this carefully.
In addition, there are different financial implications to consider with a branch vs. a subsidiary entity in India. A branch will be expected to pay a tax rate of 40% on all global profits, as it will be taxed as a foreign company. What’s more, the global business will be legally responsible for the branch, which includes any debt or financial difficulty.
If you set up a new subsidiary company, the initial process will be faster. You’ll still need to fill in countless forms but are less likely to have your financial affairs audited. Perhaps more importantly, the tax rate of a local business is considerably more favourable. Expect to pay a maximum corporate tax rate of 30% on your local profits only. This could be even lower, depending on your annual turnover and profit margin.
There are a handful of nuances that should be taken into consideration when doing business in India.
The first, and arguably most important, is the sheer amount of paperwork involved. Taxpayers in India require a number of forms and ID cards. Directors of a business require even more. To appoint somebody to such a position of seniority within an Indian business, a Director Identification Number, or DIN, is required. Nobody can hold the title of a director without this.
Indian businesses need at least two directors. These should also be shareholders within the business. One of these directors must be an Indian national, ideally based in the location that you’re trading from. With this in mind, if doing business from overseas, it’s advisable to have three directors – one based in India and two at your ‘home base.’
You’ll need a local bank account, registered to your business, to trade in India. Do not apply for this before your business is approved by the relevant authorities, though. You’ll need your company number and may well be asked for other financial and personal information. You’ll also need to ensure you have enough capital to get started. Most business will require a minimum capital investment of R1 Lahk (100,000 Rupees) to get off the ground. That’s roughly $1,300.
You should pick the location of your business in India carefully, too. If you decide to move to a different district at a later date, you’ll face a lot of administrative hurdles. You’ll need to gain written approval from all directors, then apply for permission from the Regional Director of the Ministry of Corporate Affairs. No news is good news, here. If you do not receive an objection within 21 days, you can consider your application approved.
You also need to make your intentions known to the citizens and business owners of your intended new location. They, in turn, have the right to protest or request further information. Once you clear this hurdle, you still have a great deal of paperwork to complete. In many respects, it’s better to pick the right location initially and stay put.
Finally, be aware of the differences to the Indian working week. In India, Saturday is not a day off. Employees will typically perform their duties from Monday to Saturday, 10 am to 6 pm. This is a longer working week than some western employees are used to, so consider utilising the local workforce as much as possible.
This will also endear you to Indian natives, as unemployment is considered one of the nation’s biggest problems. Any business that offers locals the opportunity to make earn a livelihood will be welcomed. With so many loyal and hard-working potential employees available, India remains a solid location to build a workforce.
Setting up in India FAQs
There are multiple options for a company establishing a presence in India. These include:
● Branch Office
● Liaison Office (no commercial activity permitted)
● Private Limited Company
● Limited Liability Company
Of these choices, most businesses and corporations choose to establish a limited liability company. This is an independent company from a legal perspective, so essentially a subsidiary business.
Typically, an Indian business will require a minimum share capital of 100,000 Rupees. You may also see this written as Rs 1 Lakh.
On average, expect to wait between 16 and 20 weeks for a business in India to become operational. You will need to complete a variety of applications to different governmental departments and a wide array of checks must be completed to make your business legally compliant.
You can, subject to approval from the Reserve Bank of India (RBI). Many businesses prefer to open a separate limited liability company in India, though. This will result in lower business tax payments and fewer restrictions based on legal compliance.
Yes, you must have a business account held at a local bank in India. This account can only be opened after the business has been approved and incorporated by the relevant authorities.
An Indian business must have a minimum of two directors. At least one of these needs to be an Indian national. With this in mind, it is advisable to have three directors, one of which is native to the region that you’re doing business in.
These are essential registrations within the Indian legal system.
A DIN is a Director Identification Number. As the name suggested, this is assigned to anybody holding – or applying for – a directorship position at a business in India. You’ll need a Digital Signature Certificate, or DSC, before applying for a DIN.
A PAN is a Permanent Account Number. This will be required for all manner of everyday tasks pertaining to finance, and also doubles up as a form of ID. All taxpayers in India, not just company directors, need a PAN.
A TAN is a Tax Account Number. This is assigned to any director of an Indian business, as they have the power – and responsibility – to deduct employee tax payments upon wage release.
Indian working patterns differ from Europe and the west. Typically, an Indian working week will last 48 hours. Employees will be expected to report to work between 10 am and 6 pm each day from Monday to Saturday.
Most Indian employees are entitled to 15 days of paid annual leave. In addition, Indian has three national holiday days. Different regions and territories will also celebrate different public holidays.
As discussed, some benefits are legally required for employees in India. In addition, other benefits are offered by most employers. Some of the most common supplementary benefits in India include:
● The option of flexibility in working hours to accommodate personal needs
● Physical and mental health wellness programmes
● On-site catering or subsidised meals
● Assistance with transport to and from work – either a company car or access to a shuttle or bus service
Naturally, these are discretionary. Be aware that many businesses will offer these benefits to entice employees, though.
All restrictions to termination of employment are subject to contract. Just remember that this works both ways. If you can terminate an employee at will as per their contract, they can walk away with a similar lack of notice. However, an employee may be entitled to request 30 days’ notice, or an equivalent wage payment, if no termination clause is inserted into their contract. In addition, any employee with over two years of service can apply for severance pay.
An Employee Provident Fund (EPF) must be set up by any business that employs 20 people or more. Essentially, the EPF is an insurance policy for Indian nationals. EPF repayments are made at 12% of the employee’s salary. In addition, the employee themselves pays an additional 12% per month. This money can be saved for retirement, or it can be accessed after three months of continued unemployment.