Income Tax Issues and Basic Procedures

India today is a vibrant, information technology savvy financially strong country. It is one of the largest industrialized countries, as also has one of the largest skilled manpower in the world.

It has a free economy with liberalized, market driven policies that strengthens the base at macro and micro levels.

The country's focus is on fast track development of infrastructure like power, communications, roadways and highways, airports etc.

Capital goods, consumer goods, service industry all have a huge market potential in India.

The controlled low inflation rate, a stable Indian rupee, repatriation of earnings, free convertibility on trade account, comfortable forex reserves and improved balance of payments position are a further reflection of the strong economy.

With a commitment to continuous reforms, the Indian economy after its turnaround from 1991 has truly and firmly set its path on globalisation.

And the firm establishment of multinational giants in India sees the success of its policies. Establishment of activities in India by foreign companies can be made through various routes.

a) Liaison office:

Before opening a full-scale branch, a liaison office could be set up. Reserve Bank of India covers its incorporation in India. This office, being a purely correspondence office, cannot conduct business activities and earn profits. Consequently there is no income tax liability. However, the liaison office has to meet its expenses through remittances from its principals abroad.

b) Branch Office:

Foreign companies can open branch offices in India for

Acting as buying and selling agents in India.

Conducting banking activities.

Undertaking business activities.

The Reserve Bank of India again governs operating of branch offices. A branch has also to be registered under the Indian Companies Act, 1956 and has to file its (branch's) accounts every year with the Registrar of Companies.

The branch, on its net income earned, has to pay tax under the Indian Income Tax Act, 1961.

c) Joint Venture (JV) / wholly owned subsidiaries (WOS):

A corporate entity can be floated in India. The permission of Foreign Investment Promotion Board is necessary in certain categories for setting up JV/WOS IN India. The foreign group can invest upto 51%/74%/100% in a corporate body in India.

Repatriation of both - the principal and the income are allowed, subject to Income tax, without any other restrictions.

d) Project Offices:

Foreign entities executing contracts in India can set up a project office in India for site supervision. RBI gives permission for such offices. Project offices cannot...