Opening an Indian Subsidiary- Advantages and Disadvantages
India has become 7th largest economy in the world and by 2025, it will become 3rd largest economy in the world.
Further, the government of India has initiated various new regulations and policies in order to improve the environment and make doing business in India a lot easier than what it used to be before in order to facilitate registration of wholly owned subsidiary in India by foreign company.
Opening an Indian Subsidiary
Lots of foreign companies want to do business in India, however, rampant corruption as well as no. of days of delays in getting approvals are major bottlenecks which resists foreign companies from opening an Indian Subsidiary.
Of late, the government has realized the aforesaid problems faced by foreign companies and therefore, taken lots of steps to decrease the approval time for formation of wholly owned subsidiary in India.
These includes doing away with initial requirement of having Director identification Number (DIN), introduction of new form for instant approval of proposed company name (RUN) and new spice form for applying for final approval for registration.
These steps will deliver results in long run and more and more foreign companies will opt for opening an Indian Subsidiary.
There are some advantages and disadvantages of subsidiary company as mentioned below which must be bear in mind before going for registration of wholly owned subsidiary in India by foreign company.
Advantages of foreign subsidiary company
- One of the advantage is that subsidiary company gets financial support from parent company in terms of funding through share subscription money, technical knowhow, training, employees and other consultancy free of cost or at very nominal price which is very difficult for any newly established company.
- Parent company can provide continuous inflow of funds by subscribing to new shares of subsidiary company and thus save it from cost of debt.
- This arrangement also provides an advantage of offsetting losses from profits.
- This arrangement also allows joint ventures with other companies
Disadvantages of foreign subsidiary company
- One of the major disadvantage is that freedom of Indian subsidiary company is restricted.
- Further, decision making power of Indian subsidiary is also restricted and becomes a time consuming process since every decision has to be discussed with parent company before reaching to final conclusion.
- Due to aforesaid reasons, control is also lost by Indian subsidiary company.
- Such arrangement is also subject to Indian tax regulations since tax department always tries to present Indian subsidiary as Permanent establishment of parent company which increases the risk of parent company being taxed in India.
- Both establishment cost as well as regulatory compliance costs of Indian subsidiary increases in case there is international transaction between Indian subsidiary and parent company as such transactions will be subject to Transfer Pricing provisions which required mandatory transfer pricing audit as well as filing of Income tax returns of both Indian subsidiary as well as parent company.
However, compare to other 2 options i.e branch office registration and Liaison office registration in India, opening and Indian subsidiary is still the most easier and viable option and also subject to less litigation. Further, with robust documentation and prior tax planning some of the disadvantages can be mitigated.
Overall, subsidiary company in India is one of best options for foreign company’s which want to start business in India.