Mandatory Compliance Needs for Subsidiary Companies in India

India is one of the world’s fastest-growing economies and a promising foreign investment destination. Most foreign companies seek entry into this market by setting up a subsidiary. However, setting up a subsidiary includes compliance with regulatory and legal requirements. This may be complex as different local laws, tax regulations, and industry-specific guidelines govern the country’s regulatory landscape.

It was further elaborated that foreign subsidiaries operating in India would be expected to comply with requirements, from company registration to ongoing statutory compliance. Understanding and performing the obligations regarding these stated elements form the basis for smoothly running business operations, avoiding legal penalties, and creating a sustainable business in India.

Know About Subsidiary Company Incorporation

The establishment of a subsidiary company in India by foreign entities should be instituted by registering under the Companies Act 2013 under the governance of the Ministry of Corporate Affairs. Registration is done in the following steps:

Director Identification Number (DIN)

It should have at least one person who normally resides in India as its director. Incorporating a DIN is a statutory requirement; all directors, residents, or foreigners should possess it.

Digital Signature Certificate

 DSC registration is required for all nominated directors to submit documents electronically to MCA.

Name Approval

Any name the company selects should not be identical to any other company name, and all MCA registration directions must be followed.

MoA and AoA

These documents define the organization’s purpose, policies and procedures, and company administration. They are statutory requirements at the time of registration.

Certificate of Incorporation

The Registrar of Companies (ROC) checks and verifies all the required filed documents. The ROC issues a Certificate of Incorporation, which recognizes the subsidiary as a legal and separate body within India.

Establish your foothold in India effortlessly by opting subsidiary company registration from initial DIN to final certification of incorporation and ensure a smooth process.

What are the Financial and Statutory Compliance?

Within a developmental stage after incorporation, foreign subsidiaries are to follow certain provisions of financial and statutory compliance:

Annual Financial Statements

• Financial Statement Preparation using IND AS: Companies must prepare their financial statements according to Indian accounting standards (IND AS). This includes the balance sheet, income statement, cash flow statement, and respective notes.
• Audit Requirements: The financial statements must be subject to audit, and a chartered accountant is usually tasked with this duty. The report of the investigation data must be forwarded to the Registrar of Corporations per the specified timeline.
• Filing of Annual Returns: The subsidiaries are responsible for filing their annual returns and recording information about the shareholders and directors and the financial report summary to the ROC.

Board meetings and General Meetings

• Board meetings: A minimum of four board meetings must be held in a calendar year, and the duration between two consecutive board meetings should not exceed 120 days.
• Annual General Meeting (AGM): Every subsidiary must hold the AGM within six months of the company’s accounting period closing. The ordinary business of the AGM includes the approval of the company’s financial statement, the payment of a dividend, and the appointment or re-appointment of directors.

Tax Compliance

Tax compliance among foreign subsidiaries in India is one of the most important aspects that cannot be overlooked. Key requirements include:

a) Corporate Income Tax

• Tax Rates- The income of foreign subsidiaries is taxed under the Income Tax Act of 1961. Corporate tax rates are currently charged at different levels. Domestic companies are charged a standard rate of 30% with surcharge and cess. For some subsidiaries qualifying for certain tax incentives, this rate may be now set at 22% or even lower.
• Tax Filing- Subsidiaries should submit their annual income tax return form by September 30th for the preceding assessment year. A penalty may be imposed if this is not done.

(b) Goods and Services Tax (GST)

• Registration under the GST Act—When a company making supplies of any goods and/or services crosses the turnover thresholds set, it must register under the GST Act and proceed with GST registration.
• Compliance with GST Returns- must be filed monthly, quarterly, or annually, depending on the GST provisions. Such returns should include sales value, purchases, and tax paid.

(c) Transfer pricing Regulations

• Arm’ s-Length Pricing- All subsidiaries are required to price all transactions with their parent companies or associated enterprises at an arm’s length.
•  Transfer pricing Documentation – All entities are required to enforce and follow the compliance documentation regarding transfer pricing policies. This includes submitting a compliance report, filing files, and filing compliance reports for each jurisdiction.

Employment and Labor Law Compliance

Similarly, as for local companies, foreign subsidiaries in India come under the purview of local labour laws, including:

• Employment Contracts: Local companies and foreign subsidiaries in India must observe the Minimum Wages Act and the Payment of Wages Act, along with other applicable laws.
• Social Security Contributions: Payments toward the Employees’ Provident Fund (EPF), Applicable ESI, and gratuity are essential.
• Labor Welfare and Safety: Companies are required to provide workplace safety, health, and welfare amenities as per The Factories Act, 1948, and other prevailing laws.

Legal Obligations

Also, their foreign operations are subject to many regulatory blueprints, which may be specific to the sectors or across sectors.

a) Compliance with Foreign Exchange Management Act FEMA

• Foreign Investment Approval: Any foreign subsidiary must comply and ensure they attain approval under the Foreign Exchange Management Act (FEMA). In cases where they receive foreign investment or financial transactions, deadlines are set within which the subsidiaries must contact the Reserve Bank of India.
• External Commercial Borrowings (ECBs): Subsidiaries raising ECBs must adhere to the RBI’s guidelines on end-use, cost, and maturity periods.

b) Compliance with Intellectual Property Rights (IPR)

• Trademark and patent application: Foreign subsidiaries are encouraged to register certain domestic trademarks, patents, and other IPRs with local Indian authorities.
• Compliance with IPR Laws: Such subsidiaries would ensure that their business does not contravene the intellectual property rights of any Indian entities or their practices.

Industry Specific Compliance

There are some sectors in Indian laws which extend the area of regulatory compliance. For example,

1. Environmental Laws: Subsidiaries in industries such as manufacturing, mining, and chemicals shall conform to the norms of the Environmental Protection Act, 1986, which prescribes requirements on the manner of waste disposal, pollution control, and other applicable laws on environmental protection.
   1. Data Privacy and Security: Since organizations deal with customers’ sensitive information, they are legally required to follow the rules under the Information Technology Rules, 2011 (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) and the Personal Data Protection Bill.
   1. Secretarial Compliance: Secretarial compliance refers to keeping and updating the statutory records such as registers, minutes of meetings, and filing forms for MCA. They are mainly regulatory and hence include the following:
2. Appointment of Company Secretary: Every subsidiary whose paid-up share capital is more than INR 10 crores shall have an appointed full-time company secretary.
3. Maintenance of Registers and Records: The company is duty-bound to maintain some statutory registers, including a register of members, a register of directors, and a register of charges.
4. Filing of Returns on Time: MCA requires that all forms and returns be filed on time to avoid any consequences; thus, all such forms and returns have to be filed within the requested time periods.

The Final Words

Constant compliance and adherence to the territorial laws of India are necessary for foreign subsidiaries as they ease their operations and protect them from legal complications and penalties. From registration to continuous statutory compliance, all the legal and regulatory processes must be performed precisely.

Meeting these criteria enables the foreign subsidiaries to build vital operations in India for their benefit and that of the economy. They should now seek legal and compliance experts in India to understand the processes and adhere to the four corners of the law, which is acceptable in India.

Explore India’s regulatory landscape with ease by visiting our website Corpbiz  and ensure your subsidiary company meets all compliance requirements and thrive in one of the world’s fastest growing market.

Frequently Asked Question

Read Our Article: Online Registration of a Foreign Subsidiary/WOS in India