How to Set Up a Private Limited Company in India
Foreign companies interested in establishing a wholly owned subsidiary in India can do so by setting up a private limited company. As of 2016, there were over 10 million active private limited companies in India.
Regulations governing private limited companies originate in the Companies Act. A minimum of two shareholders with non-transferable shares (and a maximum of 200) with a minimum share capital of Rs 100,000 (approximately US$1,500) is required to form a private limited company. The Companies Amendment Act of 2015 removed the minimum paid-up capital requirements for incorporating private (as well as public) companies in India.
Non-Resident Indians (NRIs) and foreigners are allowed to establish or invest in private limited companies in India.
Unlike public limited companies, private limited companies are much smaller and do not seek funds from the public; they instead operate using their own financial resources. This allows them to encounter fewer regulatory procedures than their public counterparts.
Private limited companies can also go public after meeting certain requirements as laid down by the Registrar of Companies (RoC).
Steps to register a private limited company in India
In January 2018, the Ministry of Corporate Affairs made the process of incorporating a private limited company free.
1. Name Approval
Name approval can also be sought while filing the SPICe (INC-32) form. This process requires the certification (apostille) of the following documents:
- Resolution from parent company for the use of trademark/main name and intention to incorporate an Indian subsidiary; and,
- Charter or certificate of incorporation of the foreign company in English.
2. Create a digital signature certificate
A digital signature certificate (DSC) is an electronic copy of a director’s identity. It takes around three to seven working days to obtain a DSC online from any of the specified Certifying Authorities (CAs).
All directors of the company should obtain a DSC, which is valid for a maximum of two years.
Foreign nationals and NRIs are required to submit self-attested copies of their passports, which have also been notarized by the Indian embassy in their home country.
3. Director Identification Number (DIN)
Every director of a company must possess an eight digit DIN. An individual is allowed to possess only one DIN, even if he/she is a director in multiple entities.
Once acquired, a DIN never expires and does not necessitate any further filings.
DIN applications must be signed electronically using a DSC. Here again, self-attested passport copies and proof of address must be submitted along with passport photographs of the proposed directors.
Since 2018, a maximum of three proposed directors may apply for DINs by submitting the Simplified Proforma for Incorporating Company Electronically (SPICe form INC-32) online.
4. SPICe Form (INC-32, INC-33, and INC-34)
INC-32 is an extremely detailed online form covering the application for DIN, reservation of company name, and incorporation of a company.
It requires 21 documents to be attached at the time of filing. The attachments include the following:
- Memorandum of Association;
- Articles of Association;
- Copy of utility bills (not more than two months);
- Proof of office address (conveyance/lease deed/rent agreement with receipts);
- Copy of certificate of incorporation of the foreign body corporate and resolution passed;
- Proof of identity and address of all directors;
- Trademark registration certificate/approval from owner of the trademark;
- List of companies having the same registered office, if any; and,
- Foreign directors/subscribers must submit an affidavit for not having a Permanent Account Number (PAN card).
Form No. INC-33 provides the electronic format of the Memorandum of Association which outlines the charter of a company.
Form No. INC-34 provides the electronic format wherein applicants input their Articles of Association (internal regulations of the company).
Upon approval, the Registrar of Companies (RoC) assigns a company with a 21 digit Corporate Identity Number (CIN).
Tax liability for private limited companies
Private limited companies set up by foreign companies are domestic companies according to the Income-tax Act, 1961.
Here we outline the effective tax rates for such companies in India.
1. Corporate Income Tax (CIT) in India
A company, whether Indian or foreign, is liable to pay CIT under the country’s Income Tax Act, 1961. While a resident company is taxed on its worldwide income, a non-resident (foreign) company is taxed only on income that is received in India, or that arises, or is deemed to accrue in India.
The surcharge on domestic companies effectively increases the total tax paid by private limited companies.
3. Health and education cess
It amounts to four percent of the CIT and surcharge for the financial year 2018-19 and assessment year 2019-20.
4. Minimum Alternate Tax
Companies having low or even no profits are subjected to a Minimum Alternate Tax (MAT) of 18.5 percent + surcharge + health and education cess.
Below we show the tax liability for a private limited company (also referred to as a wholly owned subsidiary) in India.
Why opt for a private limited company
Private limited companies allow for the creation of a shareholders agreement to demarcate different interests. In case a company is not dong financially well then under the limited liability clause the personal assets of the investors are protected.
Since the parent company controls 100 percent of the shares of its subsidiary, it can maintain strict operational management of the private limited company in India.
In India, a private limited company is the most preferred business model that benefits from both good branding as it retains the name of the parent company, while also gaining from the flexibility of being able to diversify into new markets.
Although the process for establishing a private limited company in India has eased considerably in the past few years, it still takes time to secure all the required approvals from regulatory authorities, which is why it is advisable to employ the services of a professional firm.
Rohit Kapur, Country Manager for India, Dezan Shira & Associates explains the realities of setting up a private limited company in India. He says, “The process of company registration now being online in itself does not take too long. The catch, however, is in accumulating the long list of documents (and translating into English, where required) and making sure some of these documents are notarized and others are apostilled. Invariably, this process may take up to weeks, if not months, to accomplish”.
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