Setting up a subsidiary in India involves more than just registering a company. It requires adhering to a host of compliances that ensure the smooth functioning of your business while keeping it aligned with Indian regulations. From company law to tax audits, the list of compliances can seem daunting, but understanding them is crucial to avoid penalties and legal issues.
In this blog, we will discuss the key compliances that every Indian subsidiary needs to be aware of and how to stay on top of them.
1. Company Law Compliance
If your Indian subsidiary is set up as a private limited company or a Limited Liability Partnership (LLP), it is bound by the provisions of Indian Company Law. This includes a variety of activities such as:
- Board meetings and shareholder meetings.
- Filing annual returns and maintaining financial records.
- Reporting of changes in the board of directors or the company's registered office.
Compliance with these laws ensures that your subsidiary operates within the legal framework of India, avoiding any potential issues down the line.
2. Foreign Direct Investment (FDI) Compliance under FEMA
As a foreign entity with operations in India, your capital investment is treated as Foreign Direct Investment (FDI). This falls under the purview of FEMA (Foreign Exchange Management Act), which is governed by the Reserve Bank of India (RBI).
- Capital Infusion: Every time you infuse capital into your subsidiary, you need to comply with FEMA regulations. This includes reporting the infusion to the RBI and ensuring that all foreign investments are within the allowed limits as per Indian law.
- Annual Reporting: In addition to capital infusions, FEMA laws also require annual compliance, which involves filing reports and ensuring that all foreign investments are properly accounted for.
Failure to comply with FEMA can result in penalties and delays in future funding rounds, making it critical to understand and follow the regulations closely.
3. Statutory and Tax Audits
Indian subsidiaries, like other businesses in India, are subject to audit requirements. These audits ensure that the company's financials are in order and compliant with Indian tax laws.
- Statutory Audit: A statutory audit is mandatory for all private limited companies, and it must be conducted by a certified auditor. The audit ensures that your financial statements are accurate and in compliance with accounting standards.
- Tax Audit: A tax audit is required if your company crosses a certain threshold of turnover. This audit helps ensure that your business is adhering to the tax laws and filing returns correctly. If your turnover exceeds the prescribed limits, a tax audit becomes compulsory.
Both audits are essential for maintaining transparency in your financial operations and ensuring that the company is not exposed to any legal liabilities.
4. Other Compliance Requirements
Beyond company law and audits, your Indian subsidiary may be subject to several other compliances based on its activities:
- Goods and Services Tax (GST): If your company is engaged in the sale of goods or services, registering for GST is mandatory. You will need to file regular GST returns and ensure that the appropriate taxes are paid.
- Labor and Employment Laws: Your subsidiary will need to comply with India’s labor laws, including the Employees' Provident Fund (EPF), Employees' State Insurance (ESI), and other social security benefits for employees.
- Environmental Compliance: Depending on your business operations, your company may need to comply with environmental regulations, such as those set by the Central Pollution Control Board (CPCB).
5. Consequences of Non-Compliance
Non-compliance with Indian laws can result in hefty fines, penalties, and even the suspension of business operations. These consequences can be costly, especially for foreign investors looking to establish a long-term presence in India. Therefore, it is crucial to:
- Regularly update your compliance calendar.
- Engage with experts or compliance professionals to handle complex legal requirements.
- Monitor any changes in regulations to ensure timely updates.
Conclusion
Setting up and running an Indian subsidiary involves navigating a complex regulatory landscape. From Company Law to FDI and FEMA compliance, and from statutory audits to tax filings, each compliance requirement plays an important role in ensuring your business runs smoothly. Understanding and adhering to these compliances is not only necessary for legal operations but also for building a reputable business presence in India.
To stay on top of all the compliance requirements for your Indian subsidiary, consider consulting with experts or outsourcing compliance management. This will save you time, reduce risk, and allow you to focus on growing your business.
For a deeper understanding of managing compliance for your Indian subsidiary, be sure to check out our YouTube video, where we explore these topics in greater detail.
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