Annual Audit and Compliance for Foreign-Invested Entities in India
Oct. 15 – Annual audit and compliance procedures are relatively simple for foreign representation entities compared to Indian setup entities.
Foreign Representation Entities
For annual compliance, foreign representation entities are required to file the following:
- Audited balance sheet
- Profit and loss accounts
- Director’s report
- Statutory auditors’ report
- Annual account of holding company
- List of places of business in India
Liaison office(s) that are not engaged in any trading, manufacturing or other commercial activities in India are (with approval of the Reserve Bank of India that is valid up to the end of the relevant accounting year) only required to file Indian business accounts, along with:
- A copy of an approval letter issued by the Reserve Bank of India, valid up to the end of the relevant accounting year
- Statement of receipts of payments made by the Indian branches of the company
- A statement of the company’s assets and liabilities in India
- A certificate that the company did not carry out any trading, manufacturing or commercial activity or undertake any invoicing of goods in India
All statements must be verified by an authorized representative of the foreign office and a chartered accountant practicing in India.
These documents must be submitted to the Registrar of Companies within nine months from the end of the financial year of the entity.
Indian Setup Entities
All incorporated companies, whether public or private, are required to undertake an annual audit of accounts. Audited financial reports along with the auditor’s report must be sent to the shareholders well before the annual general meeting (AGM) is held. Company accounts must be submitted to the office of the concerned Registrar of Companies (ROC) annually following an AGM.
In India, an AGM must be held once every calendar year before September 30, with the gap between two AGMs not lasting more than 15 months. The main agenda points in any AGM include a presentation of the annual accounts, and appointment of statutory auditors.
Guidelines for the annual accounts are as follows:
- Annual accounts must be filed with the office of the concerned ROC within 30 days after the AGM. If an AGM is not held, then accounts should be filed within 30 days of the last date on which the AGM was required to be held.
- Accounts must relate to a financial year, comprising 12 months and not exceeding 15 months. The company can obtain prior permission from the ROC for an extension of the accounting period to the extent of 18 months. Submissions to the ROC must be accompanied by forms 23 AC and 23 ACA.
- Annual accounts must cover a period ending no more than six months ahead of the AGM, except for the first annual accounts of a newly incorporated company, which should cover a period ending no more than nine months ahead of the AGM.
Required forms for ROC filings
- Balance sheet: e-form 23 AC
- Profits and loss account: e-form 23 ACA
- Annual return: e-form 20 B for companies with share capital and e-form 21 A for companies without share capital
- Annual compliance certificate: Form 66 to be filed by companies with paid up capital between INR1 million and INR20 million
- Auditors are appointed by the Board of Directors
- The appointed auditor must be a chartered accountant
- She or he may not be an employee or partner of the company, hold security of the company, or be indebted to it
- The auditor is always appointed from one AGM to another by the shareholders, except for the first auditor, who is responsible from start of business until the first AGM
- Auditors shall have right of access at all times to the books, accounts and vouchers of the company
- Every company with share capital is required to file an annual return with the ROC within 60 days from the date on which the AGM of the company was held. Returns should be accompanied by Form 20 B. The return is to be signed digitally by the authorized director and to be certified by the practicing company secretary, chartered accountant, cost and works accountant or lawyer. The requisite forms must be attached.
- Companies with paid-up capital of between INR1 million and INR20 million are required to file an annual compliance certificate (Form 66), signed by a full-time company secretary within 30 days from the date of the AGM, along with the annual report.
- Companies with paid-up capital of more than INR20 million are required to employ a full-time company secretary who will act as their compliance officer.
The Income Tax Act stipulates that every person carrying out a business or profession in India is required to get their accounts audited by a chartered accountant. Applicability varies according to type of work.
Foreign representation entities – liaison offices, branch offices and project offices – have a legally limited scope of activity and as a result, their compliance requirements are significantly different from those for Indian setup entities.
An audit becomes applicable when income exceeds INR10 million for companies dealing in trade and manufacturing of goods (“business”) and INR1.5 million for companies dealing in services (“profession”).
The income tax audit is applicable to companies privileged to tax on a presumptive basis only if they claim their tax to be lower than that presumed. The audit generally focuses on disallowances and non-compliance under the Income Tax Act. The last date for submission of the income tax audit report is September 30.
Indian law also specifies a number of audits that are limited to specific business types. These apply to, but are not limited to manufacturing, trading and service activities.
Portions of this article came from the August 2012 issue of India Briefing Magazine titled, “Pre and Post Incorporation Compliance for Foreign Invested Entities.” In this issue, we discuss compliance for foreign representation entities and wholly-owned subsidiaries. This issue is currently available as a complimentary download on the Asia Briefing Bookstore.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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