Setting Up an IT Company in India

Setting up IT Software and Services operations in India has certain rules and regulations. And below we have listed brief guidelines for individuals / companies interested in doing this.

Setting Up an IT Company in India

Setting Up an IT Company in India

General Indian Citizen / Company

An individual Indian citizen can set up IT software and services operations in India through the following:

  1. as an Individual / Proprietor
  2. as a Partnership / Firm / Trust
  3. as a Company registered under the Companies Act, 1956

No prior permission of Government of India is required to set up IT / Software units in India. Moreover, to encourage units in this sector, Government of India has announced many schemes:

Domestic Tariff Area: When the primary focus is to sell in the domestic market in India. This unit can be set anywhere in India. All normal laws apply. No concession is available on import duties. Exports are permitted. A special Export Promotion Capital Goods (EPCG) scheme of Ministry of Commerce can be availed. This scheme allows zero duty import of capital goods against export obligations.

Special Economic Zones (SEZs): SEZ is a new scheme announced by the Government of India. SEZs are areas where export production can take place free from plethora of rules and regulations governing imports and exports. Units operating in these zones have full flexibility of operations and can import duty free capital goods and raw material. The movement of goods to and fro between ports and SEZ are unrestricted. The units in SEZ have to export the entire production. The first two SEZs are being set up at Positra in Gujarat and Nangunery in Tamil Nadu. At the same time, Santacruz Electronic Export Promotion Zone, Kandla Export Promotion Zone, Vizag Export Promotion Zone and Cochin Export Promotion Zones have been proposed to be converted in SEZs.

Export Processing Zones (EPZ): These zones are located at various places including Cochin, Falta (Near Calcutta), Kandla, Chennai, Noida, Santacruz (Mumbai), Vishakhapatnam and Surat. A unit can be set up in these zones subject to availability of space. 'Zero import duty' and a 'special 10 years income tax rebate' are some of the incentives provided. Also, there is no restriction on quantity of domestic sales.

100 Percent Export Oriented Unit (EOU): This is similar to EPZ scheme. But in this scheme, there is no need to be physically located at EPZ. All other incentives are same as provided to EPZ units.

Software Technology Park (STP): This is a very special scheme under the Ministry of Information Technology. STPs are located at Noida, Navi Mumbai, Pune, Gandhinagar, Hyderabad, Bangalore, Chennai, Bhubaneshwar, Jaipur, Mohali and Thiruvanathapuram. This scheme offers zero import duty on import of all capital goods, special 10 years income tax rebate, availability of infrastructure facilities like high-speed data communication links, etc.

Overseas Company

A foreign company or individual planning to set up business operations in India can do so as under:

As a foreign company through a Liaison Office / Representative Office, Project Office or a Branch Office

As an Indian company through a Joint Venture or a Wholly Owned Subsidiary

Foreign Company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Companies Act, 1956.

Liaison Office / Representative Office

A liaison office is not allowed to undertake any business activity in India and earn any income here. The role of such offices is limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.

The Foreign Exchange Regulation Act (FERA) regulates the opening and operation of such offices. Also, approval of Reserve Bank of India (RBI) is required for opening of such offices. These offices have to ensure the following:

Expenses of such offices are met entirely through inward remittances of foreign exchange from Head Office abroad.

These offices do not undertake any trading or commercial activities. Commercial activities should be limited to collecting and transmitting information between overseas Head Office and potential Indian customers.

Liaison offices should not charge any commission or receive other income from Indian customers for provisioning of liaison services.

Permission for such offices is initially granted for a period of three years and may be extended from time to time.

Project Office

Foreign companies planning to execute specific projects in India can set up temporary project / site offices in India with the approval of RBI. Such approval is generally accorded in respect of Government approved projects.

Branch Office

Foreign companies engaged in manufacturing and trading activities abroad may set up Branch offices in India, with the permission of RBI, for the following purposes:

  • To represent the parent company / other foreign companies in various matters in India e.g. acting as a buying / selling agents in India
  • To conduct research work in the area in which the parent company is engaged provided the results of the research work are made available to Indian companies
  • To undertake export and import trading activities
  • To promote possible technical and financial collaborations between the Indian companies and overseas companies. A branch office is not permitted to carry out manufacturing activities on its own but is permitted to sub-contract these to Indian manufacturers

As an Indian Company

A foreign company can commence operations in India through incorporation of a company under the provisions of Indian Companies Act 1956. Foreign equity in such Indian companies can be up to 100 percent depending upon the business plan of the foreign investor, prevailing investment policies of the Government and on receipt of requisite approvals.

Joint Venture with an Indian Partner

Foreign companies can set up their operations in India by forming strategic alliances with Indian partners. Setting up of operations through Joint Venture may entail the following advantages to a foreign investor:

  • Already established distribution / marketing set up of the Indian partner
  • Available financial resources of the Indian partner
  • Already established contacts of the Indian partner that help smoothen the process of setting up operations

Foreign investments are approved through two routes as under:

Automatic Route: Approvals for foreign equity up to 50 percent, 51 percent and 74 percent are given on an automatic basis subject to fulfillment of prescribed parameters in certain industries as specified by the Government. RBI accords automatic approval to all such cases.

Government Approval: Approval in all other cases where the proposed foreign equity exceeds 50 percent, 51 percent or 74 percent in the specified industries or if the industry is not in the specified list, it requires prior specific approval from Foreign Investment Promotion Board (FIPB).

Wholly Owned Subsidiary

The foreign investor has the option of setting up a wholly owned subsidiary, wherein the foreign company owns 100 percent share of the Indian company. All such cases are subject to prior approval from the FIPB. Some of the criteria for setting up wholly owned subsidiary include:

Only "holding" operation is involved and all subsequent / downstream investments to be carried out need prior approval of the Government.

Where proprietary technology is sought to be protected or sophisticated technology is proposed to be brought in.

At least 50 percent of the production is to be exported.

Proposals for consultancy.

Proposals for infrastructure like roads, industrial model towns, industrial parks or estates.

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