Expanding into India is an exciting step for any business. The country offers a huge consumer base, a fast-growing economy, and plenty of investment opportunities. But before jumping in, you need to be aware of one thing—India’s tax system is not something you can figure out at the last minute.
From corporate taxes and GST to transfer pricing and treaty benefits, the way you plan your entry can make a big difference to your costs, compliance, and profitability.
In this guide, I’ll share some practical tax planning ideas we use when advising overseas businesses looking to set up in India.
Why Tax Planning is Crucial for Setup Your Indian Business
India’s tax environment has multiple layers—corporate income tax, GST, withholding taxes, transfer pricing rules, and international treaties. If you get it wrong, you could end up with:
- Paying tax twice on the same income
- Higher withholding rates on payments abroad
- Transfer pricing penalties
- Delays in launching due to compliance snags
The right planning ensures you enter the market with clarity, avoid unnecessary costs, and align your Indian operations with your global tax strategy.
Key Tax Considerations for Entering India
1. Choosing the Right Business Structure for Entry into India
One of the most important tax planning decisions you’ll make is how to enter the Indian market.
Your structure determines:
- How much tax you’ll pay
- The level of compliance required
- Your ability to repatriate profits
- The operational flexibility you’ll have
Here’s a closer look at the main options:
a.) Wholly Owned Subsidiary (Private Limited Company)
- Nature: A separate legal entity incorporated in India under the Companies Act, 2013.
- Ownership: 100% foreign ownership is allowed in most sectors under the automatic route (except restricted sectors like defence, media, etc.).
- Tax Treatment: Taxed as a domestic company—corporate tax rates can be as low as 22% (plus surcharge & cess) under Section 115BAA.
- Advantages:
- Profits can be reinvested in India easily.
- Lower tax rate compared to a foreign branch.
- Better perception among Indian customers and suppliers.
- Eligible for local incentives (e.g., SEZ benefits).
- Compliance: Needs to maintain statutory books, file annual returns, and follow Indian corporate governance rules.
- Best For: Long-term market presence, manufacturing, and significant operations in India.
b.) Branch Office
- Nature: An extension of the foreign company, approved by the Reserve Bank of India (RBI).
- Ownership: 100% foreign-owned; no separate shareholding structure.
- Tax Treatment: Taxed as a foreign company at 40% plus surcharge & cess.
- Advantages:
- Simple to set up compared to a full subsidiary.
- Can carry on permitted activities such as export/import of goods, consultancy, research, and representation.
- Limitations:
- Cannot engage in retail trading or manufacturing (except through subcontracting).
- Higher tax rate.
- Compliance: Annual filings with both RBI and the Registrar of Companies; audited accounts required.
- Best For: Testing the Indian market without committing to full incorporation, or when activities are limited to certain business lines.
c.) Liaison Office
- Nature: A representative office with no revenue-generating activities—meant purely for communication and coordination between the head office and Indian stakeholders.
- Tax Treatment: Since it cannot earn income in India, there’s no corporate tax liability (unless it’s deemed to have a Permanent Establishment).
- Advantages:
- Easiest and least expensive structure to maintain.
- Useful for market research and networking before fully entering the market.
- Limitations:
- Cannot sign contracts, invoice customers, or earn revenue in India.
- Activities are restricted to liaison and information gathering.
- Compliance: Annual activity report to RBI; filings with the Registrar of Companies.
- Best For: Initial market exploration and relationship building.
d.) Joint Venture (JV) with an Indian Partner
- Nature: A jointly owned entity, usually structured as a Private Limited Company or LLP.
- Ownership: Foreign partner + Indian partner, with shareholding as agreed in the JV agreement.
- Tax Treatment: Taxed as a domestic company if incorporated in India.
- Advantages:
- Access to local market knowledge, distribution networks, and regulatory insight.
- Can help in sectors with foreign investment restrictions.
- Limitations:
- Requires careful drafting of agreements to avoid disputes.
- Shared decision-making may slow operations.
- Compliance: Similar to an Indian company—board meetings, statutory filings, annual audits.
- Best For: Businesses seeking rapid market access, local manufacturing, or industry-specific expertise.
2. Using Double Taxation Avoidance Agreements (DTAA)
India has tax treaties with 90+ countries, which can:
- Reduce withholding rates on dividends, interest, royalties, etc.
- Allow credit for taxes paid abroad
- Clarify Permanent Establishment (PE) rules
For example, under the India–Singapore treaty, royalties can be taxed at 10%, which is lower than domestic rates.
3. Transfer Pricing Compliance
If your Indian entity deals with your overseas group companies, you must price transactions at “arm’s length.”
- Keep proper documentation
- Benchmark prices using accepted methods (CUP, TNMM, etc.)
- File Form 3CEB on time
Ignoring this can lead to adjustments and penalties of 2% of the transaction value.
4. GST on Cross-Border Transactions
GST applies to imports, exports, and certain services. Some planning points:
- Treat exports as zero-rated to claim input tax credit.
- Non-residents offering online digital services to Indian customers must register under GST.
- Review how goods are imported to manage both customs duty and IGST.
5. Withholding Taxes on Payments Abroad
Payments from India—royalties, technical services fees, dividends—often attract withholding tax.
- Check DTAA rates (need a valid Tax Residency Certificate).
- Include gross-up clauses in contracts to avoid absorbing the tax cost yourself.
- Structure agreements to manage tax exposure efficiently.
6. Capital Gains Tax
Foreign investors may pay capital gains tax on selling shares, property, or other assets in India.
- Listed shares: STCG at 15%, LTCG at 10% above ₹1 lakh.
- Unlisted shares: Higher rates; treaty benefits may apply.
- Indirect transfers (via offshore holdings) are also taxable in some cases.
7. Managing PE Risk
If you have a fixed place of business or dependent agent in India, you could be treated as having a PE and taxed here.
- Limit activities of liaison/branch offices.
- Keep core decision-making outside India.
- Draft intercompany agreements carefully.
8. Repatriating Profits
With the Dividend Distribution Tax removed, dividends are now taxed in the hands of the shareholder.
- Consider using intercompany loans or royalties where beneficial.
- Time remittances to get better exchange rates and manage taxes.
9. Incentives and SEZ Benefits
- SEZ units may get income tax exemptions for a certain period.
- R&D units can claim weighted deductions.
- Eligible startups may get exemptions under Section 80-IAC.
Common Mistakes We See
- Ignoring DTAA benefits and overpaying tax.
- Delaying transfer pricing compliance.
- Not assessing PE risk early.
- Overlooking GST on imports/exports.
India is a rewarding market, but tax planning isn’t optional—it’s the foundation of a smooth, profitable expansion. Work with someone who understands both Indian and international tax frameworks, and review your structure regularly as laws change.
Need guidance for entering India?
At Aplite Advisors, we’ve helped businesses from the US, UK, Singapore, and beyond set up in India with tax efficiency. From treaty planning to GST registration and transfer pricing, we can make your entry smooth and compliant.
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