Navigating the legal landscape: Essential tips for doing business in India

A thorough understanding of the intricate legal framework is paramount for entrepreneurs to achieve success in a constantly evolving landscape wherein the laws play a pivotal role in defining a business environment.
Ahlawat & Associates - Shramona Sarkar, Isha Agrawal
Ahlawat & Associates - Shramona Sarkar, Isha Agrawal

With its ever-growing consumer base, rich and diverse culture and rapidly booming economy, India poses as a business haven for entities all across the world to establish their presence in the country. Emergent foreign investments present Indian companies with multiple opportunities through foreign resources, including capital, technology, services and skills, manufacturing techniques, administrative practices, and technical know-how which boosts productivity and competitiveness in the domestic realm, thereby ensuing fiscal growth.

In order to undertake the investment, a thorough understanding of the intricate legal framework is paramount for entrepreneurs/ business entities to achieve success in a constantly evolving landscape wherein the laws play a pivotal role in defining a business environment. This article encompasses the varied facets of setting up and doing business in India, in order to be better equipped to navigate the Indian legal system and foster smooth operations. Any entity, be it domestic or a foreign entity, must ensure certain factors while doing business in India, including setting up a preferred business setup in India and undertaking legal and regulatory compliances associated with newly incorporated and existing businesses to safeguard the interests of businesses, effectively navigate nuances, and therefore be compliant with India’s dynamic legal framework.

To establish a viable business presence in any jurisdiction, an organization must apprise itself of the market conditions, undertake in-depth due diligence, and conform to the statutory compliances, consider tax ramifications, and economic offshoots. India's rapidly developing economy offers diverse prospects, but for those who are unfamiliar with it, the country's legal structure can be disconcerting. Opting for an appropriate business arrangement and adhering to industry-specific licensing requirements are significant considerations while doing business in India. Upon acquiring the legal acumen and negotiation amongst the extensive rules/ regulations through the engagement of legal and tax counsels, entities can streamline successful business operations in compliance with all applicable laws.

Key Steps and Considerations

To establish an optimal business structure in India, a comprehensive assessment is required. Therefore, it is imperative to determine the most suitable legal structure for the business, like private limited company, public limited company, partnership, sole proprietorship, limited liability company, formation of a subsidiary etc., special purpose vehicle or a joint venture. Further, in the event an entity is acquiring another entity, the acquiring entity must also conduct a thorough due diligence on the target entity in order to assess the target entity's financial health, legal status, and applicable regulations, as well as potential liabilities, ongoing litigations, and intellectual property concerns. In addition to the above, the entity must also undertake identification of the business purpose, formation of a business plan, identification of the key personnel, i.e., directors/ partners/ members/ trustees, loans and/ or raising capital/ funds, tax implications, and legal and regulatory compliances.

Deciding an appropriate structure for the business further demands deciphering and evaluating the entity's scale, investments by stakeholders, potential liability exposure, and compliance requirements. The site selection necessitates a comprehensive analysis that balances incorporation costs, available capital, and operational feasibility. Additionally, the long-term viability of the chosen legal structure must be considered in light of residency and citizenship, and potential regulatory/ legal implications that may impact business objectives. Further, a comprehensive market analysis is pivotal to recognizing industry trends, aspects of competition, consumer requirements, product/ service development, and formulating marketing policies.

Establishing a business presence in India necessitates particular navigation of workforce requirements which vary based on the operational nature and business scale. However, specific sectors of businesses are required to adhere to additional regulations as per applicable laws. As captured hereinabove, regardless of the industry, all businesses in India must also adhere to the labour and employment legislations with respect to its workforce, which encompasses essential aspects such as adherence to legal requirements pertaining to wages, leaves, working hours, termination procedures and other social security contributions for employees. Needless to say, the accomplishment of a venture is fundamentally contingent upon the quality and quantity of employees deployed and retained by such an entity.

Furthermore, a comprehensive assessment of the entity's assets, both tangible and intangible, is vital, which includes confirmation of ownership rights and registrations associated with real estate, inventory, and intellectual property such as trademarks, copyrights, patents, designs, logos, to identify and mitigate potential business risks and fostering a thriving business environment. Competing in the Indian market and undertaking investments in India also requires that the entity’s intellectual property is safeguarded.

Upon due assessment of the aforesaid attributes, potential investors/ companies can mitigate risks associated with the company's business, its assets and thus curtail exposure to any forthcoming losses or claims.

Regulatory and Legal Requirements

Upon deciphering the plausible business structure, the focus transposes to the incorporation of the entity, certificate of incorporation, commencement of the business, and charter documents such as articles of association and memorandum of association. The entity must also obtain essential registrations and/ or licenses such as goods and service tax, permanent account number, and tax deduction and account number amongst other registrations for doing business in India. Furthermore, other State-specific registrations must be procured by the entity which includes but is not limited to shops and establishment laws, professional tax, and micro, medium, and small enterprise registration.

India's economic development has accelerated significantly as a result of increased foreign direct investment from across the globe. The Foreign Direct Investment Policy of 2020 ("FDI Policy") encourages foreign direct investment in India laying down the regulatory framework concerning the general and sector-specific conditions on foreign direct investment and prohibited sectors. An entity must comply with the legal requirements and restrictions, if any, on business operations, foreign direct investments (including downstream investments), overseas direct investments, remittance of funds, and repatriation under the applicable laws including the Companies Act, 2013, the FDI Policy, and the Foreign Exchange Management Act, 1999 and rules made thereunder.

Given the intricacies of the laws in India, seeking legal guidance from experienced professionals is recommended for assistance with regards to the structuring of the entity, negotiation of terms of investment, and drafting of definitive agreements including emphasis on shareholder rights, subscription of shares, share purchase, etc., navigating the incorporation process including the secretarial/ legal compliances, and ensuring fulfillment of the reporting requirements. India's legal landscape offers a rewarding ecosystem for businesses equipped with the tools to navigate its intricacies. Understanding the key legal considerations outlined in this article empowers foreign and domestic investors to establish and operate their ventures successfully in India.

Tax Ramifications

Investing in the Indian market presents exciting avenues, but thorough tax planning is crucial. Foreign companies must determine tax obligations and consider potential withholding of taxes on payments to non-residents, to ensure compliance with India's multifaceted tax regime for a profitable business venture, including both direct and indirect taxes. The Income Tax Act, 1961, governs direct taxation, levying income tax on domestic companies at rates based on the company’s size and the industry. In 2017, the goods and services tax, a multi-tiered indirect tax, was implemented which applied across the nation's supply chain of goods and services. Understanding the intricacies of the goods and services tax registration, compliance procedures, and input tax credit mechanisms is crucial for efficient tax management by an entity doing business in India. Navigating the tax ramifications and its impact on business efficacy remains key in dynamic industrial conditions.

India's legal and tax framework, while complex, offers immense potential for businesses seeking to establish themselves in this dynamic industry. Further, given the legal complexities, tax due diligence can facilitate navigating the labyrinth, ensuring legal compliance, optimizing tax efficiency, and mitigating potential risks. With a well-informed approach, businesses can delve into prospects of establishing themselves in the Indian economy and attain long-standing success. Further, the type of business structure in India, whether a liaison office, branch office, subsidiary company, or joint venture, can also impact the quantum and extent of tax ramifications.

Conclusion

India's burgeoning economy with its immense potential attracts foreign companies to undertake investments in India and set up businesses. Both foreign and domestic entities must navigate the process of setting up a business while considering the desired scale of business, ownership, funding requirements, and industry-specific norms/ regulations. A thorough evaluation of accessible business structures, associated risks, and required compliances within the commercial ecosystem empowers foreign and existing Indian entities to establish a robust foundation for sustainable growth and enduring dynamic economic conditions.

Through the inflow of capital, innovations, and technologies, foreign investments can stimulate business expansion and provide access to businesses, and global supply chains. To traverse the Indian economy with ease, foreign/ domestic companies undertaking investments or doing business in India must recognize and thereafter adhere to the legislative framework. It is also vital that entities establish robust trust and develop cross-cultural insight with regional consultants, foster partnerships, and thereby warrant compliance with norms and mitigation of plausible risks. Therefore, via meticulous planning and execution of comprehensive strategies, entities can establish a firm foundation for long-term economic prosperity in India's ever-evolving market conditions.

About the authors: Shramona Sarkar is a Senior Associate and Isha Agrawal is an Associate at Ahlawat & Associates.

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