Setting Up in India: The Finance and Compliance Guide for Foreign Companies
India is a real opportunity. The compliance is also genuinely complex. Get the structure right at the start.
Most foreign companies that decide to enter India spend the first few months surprised by how many layers there are. Central regulations, state-specific requirements, sector restrictions, foreign investment rules, currency controls - each adds a layer on top of the last.
Getting the structure wrong at the start doesn't just create a compliance problem. It creates a restructuring problem later, which is slower and more expensive.
The companies that set up smoothly are not necessarily the largest or best-resourced. They're the ones that came in with the right entity, the right filings, and someone who knew which obligations applied from day one.
This guide covers the essentials: entity options, regulatory obligations, and the financial framework you need in place before operations begin.
Step 1: Choose the right entity structure
The first and most consequential decision is how your Indian presence is legally structured. Each option carries different tax treatment, liability exposure, compliance obligations, and restrictions on what activities can be conducted.
Private Limited Company (Pvt Ltd)
The most common and generally recommended structure for foreign companies entering India with a long-term commercial intent.
Key features:
- A separate legal entity; liability is limited to share capital
- Can conduct any lawful commercial activity
- Can hire employees, sign contracts, own assets, and raise local debt
- Foreign investment governed by FEMA (Foreign Exchange Management Act)
- Requires a minimum of two directors, one of whom must be an Indian resident
- Subject to full Indian tax regime: corporate tax, GST, TDS, and annual ROC filings
Best for: Businesses planning to sell in India, build a local team, or establish a long-term operational presence.
Limited Liability Partnership (LLP)
A hybrid structure combining features of a company and a partnership. Less commonly used by foreign entrants due to restrictions on foreign direct investment via the automatic route.
Key features:
- Partners have limited liability
- Lower compliance overhead than a Pvt Ltd in some respects
- Foreign investment in LLPs requires government approval (not automatic route) in most cases
- Cannot issue equity shares (limits fundraising options)
Best for: Professional services firms or specific sectors where LLP is the standard structure, and where government approval for foreign investment has been secured.
Branch Office
An extension of the foreign parent, not a separate legal entity. Profits are repatriated to the parent.
Key features:
- Can conduct activities specifically permitted by the Reserve Bank of India (RBI)
- Cannot undertake retail trading or manufacturing without specific approval
- Subject to Indian income tax on income earned in India
- Requires RBI approval before establishment
Best for: Companies that want to test the Indian market without full incorporation, or those conducting specific permitted activities (buying/selling agents, research, IT services for the parent).
Liaison Office
The lightest touch: a representative office that can conduct market research, promote the parent's products, and act as a communication channel. Cannot generate revenue in India.
Key features:
- Cannot conduct commercial activities or earn income in India
- All expenses funded from abroad
- Requires RBI approval, renewed annually
- Very low compliance burden
Best for: Companies in early market exploration mode, not yet ready to commit to a full entity.
Step 2: Foreign investment compliance - FEMA and RBI
All foreign investment into India is governed by the Foreign Exchange Management Act (FEMA) and administered by the Reserve Bank of India (RBI).
Automatic Route vs Government Route
Automatic Route: Foreign investment is permitted without prior government approval in most sectors. The company simply receives the investment, allots shares, and reports to the RBI.
Government Route: Certain sectors (defence, media, banking, insurance, and others) require prior approval from the relevant ministry before foreign investment can be received.
Before investing, confirm which route applies to your sector. Investing without the required approvals is a FEMA violation with serious consequences.
FC-GPR Filing (Foreign Currency - Gross Provisional Return)
Within 30 days of allotting shares to a foreign investor, the Indian entity must file Form FC-GPR with the RBI through the RBI's FIRMS portal. This reports the details of the investment received.
Missing this deadline attracts compounding penalties and can complicate future filings.
Annual Return on Foreign Liabilities and Assets (FLA Return)
Every Indian company that has received foreign investment must file an FLA return annually by July 15th with the RBI. This reports outstanding foreign liabilities and assets as at March 31st.
Non-filing attracts penalties and creates compliance gaps that surface during audits or subsequent investment rounds.
Transfer Pricing
If your Indian entity transacts with the foreign parent (for services, technology, intellectual property, or loans), those transactions must be priced at arm's length (as if between unrelated parties) and reported in a Transfer Pricing study.
Transactions above ₹1 crore with international related parties require a Transfer Pricing report (Form 3CEB) filed with the Income Tax return. This is one of the most commonly missed obligations for foreign-owned Indian entities.
Step 3: Tax registration and ongoing compliance
Corporate Tax
Indian corporate tax rates for domestic companies:
- Base rate: 25% for companies with turnover up to ₹400 crore; 30% above
- New manufacturing companies: 15% concessional rate (if incorporated after October 2019 and commencing production by March 2024)
- Minimum Alternate Tax (MAT): Applies when the regular tax liability is below 15% of book profits
Foreign companies (Branch or Liaison offices) are taxed at 40% on India-sourced income.
GST Registration
If your Indian entity is selling goods or services in India, GST registration is required once turnover crosses ₹20 lakh (services) or ₹40 lakh (goods). Businesses making interstate supply or e-commerce sales must register regardless of turnover.
GST compliance involves monthly GSTR-1 and GSTR-3B filings, annual GSTR-9 reconciliation, and GSTR-9C audit reconciliation for businesses above ₹5 crore turnover.
TDS (Tax Deducted at Source)
Indian TDS obligations apply to the Indian entity from day one of operations: salary payments, professional fees, contractor payments, rent, and more. Obtain a TAN (Tax Deduction Account Number) before making any applicable payments.
Particular attention needed for payments back to the foreign parent (royalties, management fees, technical services), which attract TDS under Section 195, with rates dependent on applicable tax treaties (DTAA) between India and the parent's country.
Withholding Tax on Repatriation
When the Indian entity pays dividends to the foreign parent, a withholding tax applies. The rate under domestic law is 20%, but applicable tax treaties often reduce this. Consult the DTAA between India and the parent country before structuring any dividend payments.
Step 4: State-level compliance
India's regulatory environment operates at both central and state levels. The state in which your entity is registered and operates adds a further layer of compliance:
Professional Tax: Most Indian states levy professional tax on employees' salaries, collected and deposited by the employer monthly or annually depending on the state.
Shops and Establishments Act: Every commercial establishment must register under the relevant state's Shops and Establishments Act within a specified period of commencing operations. Penalties for non-registration vary by state.
State GST Registration: GST registration in each state where the business has a physical presence or conducts taxable supply is required. A company with offices in Mumbai, Bengaluru, and Delhi needs separate GST registrations in Maharashtra, Karnataka, and Delhi.
Labour Law Compliance: Employment contracts, working hours, leaves, and termination procedures are governed by state-specific labour laws and recently updated central Labour Codes. Payroll compliance must align with both.
Step 5: Banking and operational setup
Opening a Current Account
An Indian entity requires a current account with an Indian bank. Banks require:
- Certificate of Incorporation
- PAN card of the company
- Board resolution authorising account opening
- KYC documents for directors and signatories
- Address proof for registered office
For foreign-owned entities, some banks require additional FEMA compliance documentation. Allow 2–4 weeks for account opening.
Registered Office
Every Indian company must have a registered office address in India from the date of incorporation. This is the address where all government and regulatory correspondence is sent.
A registered office can be a commercial space, a shared workspace, or a director's residence (with consent). It must be a physical address. A PO Box does not qualify.
Intellectual Property
If the Indian entity will use the parent company's brand, technology, or IP, ensure there is a formal licensing agreement in place, priced at arm's length and properly documented. Undocumented use of parent company IP creates transfer pricing risk and potential tax exposure.
Common mistakes foreign companies make entering India
Choosing the wrong entity structure
A Branch Office seems simpler than a Pvt Ltd, but the restrictions on permitted activities and the ongoing RBI oversight often make it more complicated in practice. Get the entity decision right at the start; restructuring later is expensive and time-consuming.
Missing the FC-GPR 30-day filing window
This is one of the most frequently missed filings. The clock starts from the date of share allotment, not the date of money transfer. Many companies miss it by weeks, triggering a compounding penalty structure.
Underestimating transfer pricing obligations
Any transaction between the Indian entity and the foreign parent (including management fees, technology licensing, and back-office services) requires arm's length pricing and potentially a Transfer Pricing report. This is frequently overlooked until the first tax audit.
Not registering for GST in every state of operation
A company with teams in three cities often has three separate GST registration obligations. Operating with a single registration where multiple are required is a compliance violation.
Treating India as a single regulatory environment
Central compliance is one layer. Each state adds another. HR policies, professional tax, and labour law compliance vary meaningfully between states. Build state-by-state compliance into your operating model from the start.
Key takeaways
- Entity choice matters: a Pvt Ltd is right for most commercial operations; a Branch Office suits specific limited-activity use cases; a Liaison Office is for exploration only
- All foreign investment must follow FEMA: automatic route for most sectors, government route for restricted ones; FC-GPR filing within 30 days of share allotment is mandatory
- GST, TDS, corporate tax, and Transfer Pricing apply from day one of operations. These are not deferred obligations.
- State-level compliance adds a layer on top of central requirements: professional tax, state GST registration, Shops and Establishments registration, and labour law compliance all vary by state
- Payments from the Indian entity to the foreign parent (dividends, royalties, management fees) carry withholding tax obligations governed by applicable tax treaties
Getting the setup right from day one
The companies that struggle in India are almost never the ones that got unlucky. They're the ones that moved too fast on entity decisions, missed early filings, or assumed their international compliance experience would translate directly. It doesn't always.
The good news: India entry is manageable when you come in with the right structure and someone who knows the obligations from the start.
Initium's India Entry Advisory team works with foreign companies at every stage of market entry, from entity setup and FEMA compliance to ongoing GST, TDS, and transfer pricing. If you're planning to enter India and want a clear picture of what the right setup looks like for your business, talk to our team.