Compliances

Compliances Checklist for Foreign Subsidiary Companies In India

With increased globalisation and liberalisation, numerous international businesses have entered India in an effort to diversify and expand their business portfolios. All businesses that have been established in India, whether they are domestic or foreign, are required to abide by the laws and regulations put in place by the government. The main distinction is that compared to Indian entities, foreign subsidiaries in India are subject to far stricter compliance standards.

What is a Foreign Subsidiary Company?

If a foreign company owns at least 50% or more of a company’s equity shares, that company is regarded as having a foreign subsidiary. In this situation, the named foreign corporation is also called the holding company or parent company. A corporation must be incorporated in India in order to be classified as a foreign subsidiary company in India. It doesn’t matter where the parent company is incorporated.

Compliance requirements depend on a variety of business factors. One must be aware of the regulations that must be followed depending on the sort of company that is established, the sector in which it operates, the number of employees, and the yearly turnover.

Section 2(42) of the Companies Act 2013^[1] defines a foreign company as one that is required to abide by the laws and orders of various jurisdictions. A “foreign company” is any company or body corporate that was incorporated outside of India and

• Operates a business in India, whether directly or through an agent, physically or through electronic mode; and 
• Does any business activity in India in any other way.

Important Compliance for Foreign Subsidiary Company in India

Foreign subsidiaries operating in India must abide by several laws and regulations to operate inside the country’s legal system and avoid penalties. Below are the important compliances for the foreign subsidiary company in India:

Compliances under the Companies Act of 2013

According to Sections 380 and 381 of the 2013 Companies Act, the foreign subsidiary firm must comply with the following crucial requirements:

• Under Section 380, Form FC-1: The FC-1 form is crucial since it must be submitted within 30 days of the subsidiary company’s incorporation in India. The form must be submitted, along with the necessary documents, certifications, etc., from other Indian regulatory organisations, including the RBI.
• Form FC-3 under Section 380: Depending on where the company was incorporated in India, this form must be submitted to the relevant Registrar of Companies (ROC). The form must include information on the locations where the company will conduct operations as well as the company’s financial records.
• Form FC-4 under Section 381: This form relates to the company’s yearly returns. It must be submitted within sixty days of the conclusion of the prior fiscal year.
• Financial statements: For its Indian operations and business, the company must provide financial statements within six months of the fiscal year’s end. They must include the following: – Statements on the transfer of funds, Statements of repatriated earnings – Statements on related party transactions, such as sales, transfers of property, purchases, etc.
• Accounts must be audited: A practising chartered accountant must audit all of the foreign subsidiary company’s accounts. The company must prepare and make these accounts readily available for the audit.
• Document authentication and translation: The corporation submitting every document to the ROC must be approved by an attorney practising in India. Additionally, these documents must be translated into English before being validated and submitted.

Compliance under FEMA 

Under RBI regulations and FEMA standards, there are two event-based compliances, namely:

FC-TRS: It covers the exchange of shares in a foreign subsidiary company between Indian residents and non-resident investors. A gift or a sale could be used to make such a transfer. Within sixty days after the transfer date, a transaction like this must be recorded in compliance with foreign direct investment regulations.

In this case, the responsibility for submitting this form lies with the investee company or the Indian resident. This regulation is applicable regardless of whether the Indian resident is the transferor or the transferee.

FC-GPR: It deals with remittances that shareholders of a foreign subsidiary company receive. The form describes the way in which the company will pay its shareholders. It should be notified within thirty days of the allotment of shares. This form is available in the RBI SMF portal.

Annual returns on assets and foreign liabilities have to be filed on or before 15th July of each year. It has to be filed on the RBI FLAIR system.

Compliances under the Income Tax Act

Foreign subsidiaries operating in India must comply with several tax regulations, including those governing income tax, the goods and services tax (GST), and transfer pricing. 

Income Tax: Foreign subsidiary companies that make a profit in India are required to pay income tax on those profits. For international businesses, the tax rate is 40% plus a surcharge and an education cess. In addition, international businesses must withhold tax from a number of payments made to them by Indian citizens, including dividends, interest payments, and royalties.

GST: Foreign subsidiaries that are involved in the supply of goods or services in India are obliged to register for the Goods and Services Tax (GST).

Regulations for Transfer Pricing: Transactions between a foreign subsidiary company and its related parties, including the parent company, must be done on an arm’s length basis in accordance with Indian transfer pricing legislation. The Indian tax authorities have the right to change the prices and tax of the subsidiary firm appropriately if the transaction was not carried out on an arms-length basis.

Based on how frequently these compliances occur, there are three different sorts of compliances:

Periodic Compliances: Compliances that the business must meet on a regular basis are known as periodic compliances. This kind of compliance frequently occurs throughout the year, as opposed to once a year. These compliances could have to be fulfilled every quarter or every six months.

Annual Compliances: Annual compliance is a requirement that must be satisfied once a year. The business must mandatorily comply with these regulations every year. For instance, the business must perform the following annually: – GST filings, TDS filings in accordance with the Income Tax Act, RBI compliance, SEBI compliance, and Annual Financial Statements.

Event-based Compliances: One of the three types of compliances, as already mentioned, is event-based. It indicates that these compliances are required only in the event of a certain occurrence or firm’s action.

Labour and Employment Laws

India has a number of employment and labour regulations that regulate the rights and obligations of employers and employees, and foreign subsidiaries operating in India are obligated to abide by these laws. These are listed below:

Minimum Wages: The minimum wage rates for employees working in various industries and occupations are outlined in the Minimum Wages Act of 1948. Employers must pay their staff the minimum specified by the state’s or the central government’s minimum wage, whichever is higher.

Benefits for Employees: Under the 1952 Employees’ Provident Funds and Miscellaneous Provisions Act, employers are required to contribute a set proportion of their employees’ salaries to the Employees’ Provident Fund (EPF) and other social security programmes. In accordance with the relevant rules, employers must also offer their workers additional perks like maternity leave, gratuities, and medical insurance.

Workplace safety: Employers are required to provide a safe and healthy working environment for their employees under the Factories Act of 1948 and other related laws. Employers must abide by a number of safety regulations pertaining to the layout, construction, and maintenance of the workplace.

Harassment and Anti-Discrimination: The Indian Constitution and various employment regulations prohibit discrimination on the basis of gender, religion, caste, or race. The Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act of 2013 mandates that employers treat all workers equally and forbid sexual harassment in the workplace.

Corporate Governance:

Corporate governance rules, which control the composition of the board of directors, shareholder meetings, and annual filings, must be followed by foreign subsidiaries operating in India. These laws are described as follows:

Board Membership: Foreign subsidiaries must have a board of directors that the board must hold meetings at least four times a year, and the minutes must be kept on file in accordance with the relevant laws.

Meetings of Shareholders: Foreign subsidiary firms are required to hold annual general meetings (AGMs) of shareholders at which the annual financial statements are presented and directors are elected or re-elected. Additionally, shareholders have the right to vote on the resolutions put forth at the meeting and receive notice of the meeting.

Annual Filings: Foreign subsidiary firms are required to submit a number of documents to the Ministry of Corporate Affairs each year, including annual financial statements, director’s reports, and auditor’s reports. A certified auditor must audit the yearly financial statements, and the auditor’s report must be submitted with the financial statements.

Importance of a foreign company adhering to Indian compliance

A foreign subsidiary company must adhere to all regulations because breaking them could have serious consequences. The company could face fines, penalties, and criminal charges, which could result in imprisonment under the relevant laws if necessary compliance requirements are not completed. The penalties that can be imposed on a company for non-compliance are as follows: –

In accordance with Section 392 of the Companies Act 2013:

• According to Section 392 of the Companies Act of 2013, a foreign corporation that violates any rules and regulations is subject to a minimum fine of 1 lakh rupees and a maximum fine of 3 lakh rupees. If the offence is still in process, a fine of INR 50,000 will be levied for each day the offence continues.
• A minimum fine of INR 25,000, a maximum fine of INR 5 lakh, and a term of imprisonment of up to 6 months are imposed on each officer of a foreign company who is in default. It is crucial for a business to adhere to all legal requirements in order to maintain proper business operations free from government interference. 

For the reasons listed above, a foreign company must adhere to Indian Compliance; otherwise, the company needs to face severe fines.

Conclusion

All businesses launched in India must follow the rules and regulations established by the government. It makes no difference who owns the businesses, whether Indian or foreign. The main difference is that foreign-owned subsidiaries are subject to stricter legal requirements and regulations than Indian-owned companies. Non-compliance can result in harm to one’s reputation, financial losses, and legal consequences. Therefore, to function efficiently and preserve a positive reputation in the market, foreign subsidiary companies must ensure they abide by all applicable laws and regulations in India.

Also Read: Compliances for Foreign Subsidiary Company in India