Over decades of helping foreign companies establish themselves in India, I saw many expensive problems originate in decisions taken before incorporation. Commercial enthusiasm moves faster than regulatory and financial planning! Undue spendings follow. Sharper initial insights are key.
Let’s bring that experience to work for you. Here are five questions Australian boards should dwell on before committing capital to India.
- Are you testing, trading or establishing?
The first decision is not which entity to incorporate, but what the company intends to do.
You believe your goods or services will hold sway in India but don’t wish to overly commit right away. To test the market, you may appoint an agent or establish a Branch Office (BO) or Liaison Office (LO).
A LO represents the Australian parent, develops relationships and gathers market intelligence. It cannot directly undertake commercial activity in India, and is therefore non-taxable. But if it side-steps that character, for example allowing India employees a sales commission on contracts bagged by the parent, it creates tax and regulatory exposure. The contractual obligations need to be sandboxed.
A BO is a step up. It can conduct commercial activities and earn revenues in India. It is taxed as a foreign company and therefore tax inefficient, but still good for short-term experimentation.
Agents, at arm’s length, work well. But contracts need to be watertight, and so must their fiefdom. Else, the not so friendly tax officer may closely look at our affairs. An agent acting solely or largely for the parent may be classified as a permanent establishment, exposing the parent to taxes in India on India-linked income. For exports through distributors or agents, customs valuation, importer-of-record responsibilities and GST must be determined before goods move.
A wholly owned subsidiary, whether a Company or LLP, is better suited where the idea has been tested or research indicates the business should go full steam. It provides greater control and flexibility, but brings the full suite of regulatory compliances and reporting, though a little less in an LLP. A JV with an Indian partner can be considered where local capability or shared investment is important.
Bottomline, the structure should follow the commercial strategy, not the other way around.
- Is your Intellectual Property (IP) protected in India?
Australian or US registration does not automatically protect a trademark, patent or design in India. Registration should begin early, before the brand gains visibility or a distributor relationship deteriorates.
India provides solid remedies for infringement, but enforcement depends heavily on evidence. We have assisted foreign companies in assembling records and proof of ownership, prior use and loss. This is easier when protections are built into the model from the start.
- How will the operation be funded, and how can the parties exit?
LO and BO is funded by inward remittances from its parent, though BO can also use its Indian income.
A wholly owned subsidiary is funded through equity, permitted debt or a combination. Each option has a bearing on interest deductibility, withholding tax, transfer pricing and repatriation. Worth going deeper with your advisor in India so all bases are covered.
A JV requires partner contributions. Future funding becomes difficult if one partner cannot or will not contribute. Agreements should address capital calls, dilution, default, deadlock, valuation and exit. That ensures operations are not hampered and exits or takeovers are part of pre-emptive actions.
- Has the funding been correctly reported?
Receiving money does not complete the funding process. In India, foreign investment and borrowing must be correctly classified and reported to the central bank i.e. the Reserve Bank of India.
Equity issuance, share transfers, LLP contributions and external borrowings have different forms and timelines. The cleanest approach is to agree the reporting route with the bank before funds arrive and prepare valuation, KYC and corporate records in advance. We often see this as a key problem when Australian corporates work through consultants less aware of strategizing foreign corporate India entry.
- How will goods, services and profits move?
If India will operate as your limited-risk, cost-plus service centre, its functions, assets, risks and margin must support that characterization. Tax authorities will examine whether actual conduct matches agreements and whether the return is arm’s length.
Goods, royalties, management charges, technical services, employee costs and reimbursements trigger customs duty, GST, withholding tax and transfer pricing. Contracts, authority levels and remuneration policies must therefore serve as practical guardrails.
Profit repatriation should be planned at entry. Dividends, interest, royalties and service fees carry different tax and regulatory consequences. Management charges require evidence that services were genuinely provided and benefited the Indian business. Equally, cash must remain in India for working capital and expansion.
Successful India entry begins with a feasibility study integrating the commercial model, tax consequences, funding, intellectual property, federal and state regulation, local approvals and exit strategy.
Incorporation is a filing. Building a sustainable Indian business is an architectural decision.
Published in - Indo-Australian Chamber of Commerce
______________
Authored by:
Ajay Sethi
Managing Partner
Baker Tilly ASA India