Compliance walkthrough for an Indian subsidiary

Expanding into India by establishing a subsidiary offers global businesses a gateway to tap into one of the world’s fastest-growing economies. However, operating a subsidiary in India comes with its own set of compliance requirements, many of which can seem overwhelming. This guide provides an overview of the key compliance areas every business should understand to run their Indian subsidiary smoothly and in compliance with local regulations.

Important Compliances Applicable for an Indian Subsidiary

Indian subsidiaries are governed by a host of laws that businesses need to adhere to for smooth operations. The Companies Act, 2013 is the central legislation that covers the incorporation process, governance, and regulatory compliance of companies. This Act mandates regular filings, such as annual reports and financial statements, and also governs the functioning of the board and shareholders. Alongside this, companies need to comply with the Foreign Exchange Management Act (FEMA), which regulates all cross-border transactions, including inbound investments and remittance of funds. Additionally, subsidiaries must ensure compliance with India’s labor laws, which involve employee benefits, provident funds, and gratuity. Companies are required to follow various employee welfare schemes to ensure their workforce is protected.

Decoding Softex Compliance for an Indian Subsidiary

For Indian subsidiaries involved in the export of software or services, Softex compliance is a key requirement. This compliance involves registering with the Software Technology Parks of India (STPI), which facilitates the export of software from India. Subsidiaries must file Softex forms with the STPI to declare their export invoices, thereby ensuring that they meet the necessary guidelines set by the Reserve Bank of India (RBI). This process helps maintain transparency and ensures that the earnings from exports are routed in accordance with FEMA regulations.

Understanding Corporate Tax and Transfer Pricing for an Indian Subsidiary

Corporate tax compliance is another critical area for Indian subsidiaries. The Indian tax system has a range of tax rates based on turnover and other criteria. Companies must ensure that they comply with the corporate tax rates and file annual tax returns. An equally important aspect is transfer pricing, which applies to transactions between the parent company and its subsidiary. The Indian Transfer Pricing Regulations require subsidiaries to maintain detailed documentation for all cross-border transactions to ensure that they adhere to the "arm's length" principle. This means the pricing of goods, services, or intellectual property between the parent and subsidiary must be consistent with what would be charged between unrelated entities. Failure to comply with transfer pricing regulations can result in hefty penalties.

Understanding Goods & Services Tax (GST) for an Indian Subsidiary

Goods and Services Tax (GST) is a unified tax system applicable to the supply of goods and services in India. Any Indian subsidiary that crosses the threshold for taxable turnover is required to register for GST. This involves regular filing of returns, including monthly and annual GST returns. Additionally, subsidiaries must ensure that they maintain proper invoicing practices, manage input tax credits effectively, and comply with the reverse charge mechanism if applicable. Compliance with GST is a crucial aspect of doing business in India, and companies must ensure that they are up-to-date with the latest amendments and guidelines.

Decoding Various Licenses Needed to Run an Indian Subsidiary Compliantly

Depending on the industry, the Indian government requires subsidiaries to obtain specific licenses to operate compliantly. A basic requirement for most businesses is registration under the Shops and Establishment Act, which governs commercial setups. Additionally, certain industries such as food and beverages may require an FSSAI license, while others may need industry-specific approvals or registrations. For any business that deals with taxable goods and services, obtaining a GSTIN (Goods and Services Tax Identification Number) is essential. These licenses are necessary to ensure that the subsidiary operates within the legal framework and avoids any potential disruptions to its operations.

Understanding Various Accounting & Payroll Functions for an Indian Subsidiary

Accounting and payroll compliance are key functions for any Indian subsidiary. Subsidiaries must maintain accurate books of accounts in accordance with Indian Accounting Standards (Ind-AS). This ensures that financial records reflect the true and fair status of the company’s finances. In addition, payroll compliance is vital for ensuring that employees’ salaries, bonuses, and other benefits are processed in accordance with Indian laws. Subsidiaries must also comply with the Tax Deducted at Source (TDS) provisions, which require employers to deduct a portion of employees’ income taxes and remit it to the government. Compliance with social security schemes such as the Provident Fund (PF) and Gratuity is also a must for ensuring that employees’ rights are protected.

How to Consolidate the Indian Subsidiary Books with the Parent Company

Once a subsidiary is operational, consolidating its financial records with those of the parent company is essential for accurate reporting. This involves aligning the subsidiary's books with the parent company’s financial framework. Many global businesses follow International Financial Reporting Standards (IFRS), while Indian companies typically follow Indian Generally Accepted Accounting Principles (GAAP) or Ind-AS. Subsidiaries need to ensure that their accounting practices are consistent with the parent company's standards. This often requires adjustments to bring the subsidiary’s financial records in line with the consolidation rules, including aligning accounting treatments for revenue, expenses, and taxation. Many companies use integrated accounting software to streamline this process and maintain uniformity across multiple geographies.

Final Thoughts

Running a compliant and successful Indian subsidiary requires a clear understanding of the regulatory landscape and careful attention to various compliance requirements. From corporate tax to labor laws and GST, ensuring adherence to these guidelines is crucial for avoiding legal issues and ensuring smooth operations. Collaborating with legal, tax, and compliance experts can help simplify these complexities and enable your business to thrive in the Indian market.

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