In this article, we shall take you through all the Mandatory Compliances that are applicable on a Subsidiary Company, at different points of time, during the year.
A subsidiary company is any company, where 50% or more of its share capital is owned by a company that is incorporated in another foreign nation. The said foreign company is called the holding company or the parent company. Subsidiary Companies, being registered in India, are governed by Indian laws, like any other Indian company.
For details relating to incorporation of a foreign subsidiary company in India, please refer the following link : Incorporation of a Subsidiary in India
Compliances are based on many aspects of the company. One must understand what all compliances are supposed to be met according to the type of company that is incorporated, the industry of operations, annual turnover, number of employees and so on.
Subsidiary Compliances with the Reserve Bank of India
Once the Incorporation is approved, the subsidiary can immediately proceed to open a Bank account in India. Subsequently, the foreign shareholders have to remit the minimum Share Capital, as stated at the time of incorporation. The Reserve Bank of India (RBI) mandates some reporting compliances on remittance of foreign investment into India. This involves registering the Company and the Director(s) with the RBI and filing of necessary Forms for reporting details of foreign remittance.
- One-time Reporting to be made in Form Foreign Currency Gross Provisional Return (FC GPR) within 30 days of receipt of capital remittance.
- Annual Reporting to be made in Form FLA, which is a Statement of Foreign Assets and Liabilities, as reflecting in the books of the Indian Company.
Regular Business Compliances :
The Subsidiary, being an Indian Company will be subject to the tax laws and compliances prevalent in India. These include:
- Maintenance of Books of Accounts: It is imperative for every subsidiary to maintain its books of accounts in accordance with the prevalent accounting standards in India, on a regular basis and ensure correct reporting of financial information to the various regulatory authorities, from time to time.
- Statutory Audit – It is mandatory for every Private Limited Company to appoint a Statutory Auditor and conduct a yearly Audit in accordance with the provisions of the Companies Act, 2013.
- Tax Audit – It is mandatory for every Indian entity to conduct a Tax Audit through its appointed Tax Auditor in accordance with the provisions of Indian Income Tax Act, if its turnover for a particular Financial Year exceeds Rupees Ten Crores.
- Compliances with the Registrar of Companies (RoC) – There are various compliance requirements mandated under the Companies Act, to be fulfilled with the Registrar of Companies. These include:
- Appointment of Auditor
- Filing for commencement of business in Form INC 20A
- Maintenance and Filing of Minutes and Notices of compulsory Board Meetings
- Preparing the directors disclosures of interest in other concerns in Form MBP-1
- Maintenance of Minutes of Annual General Meeting Minutes and related documents;
- Preparation of Director’s Report and Annual Report for the Company
- Updating Director’s KYC on an annual basis
- Filing of Form DPT-3, if applicable
- Filing of Annual Return in Form MGT-7
- Filing of Financial Statements in Form AOC-4
- Maintenance of Statutory Records and Registers.
- Goods and Service Tax (GST) – This is a nation-wide indirect tax, applicable on all entities in India. The GST rates applicable on the company are based on the nature of services and goods provided.
Regular GST compliances include:
Monthly Return of Outward supplies in GSTR-1
Monthly/Quarterly Return in GSTR-3B
Annual Filing of GST Return in GSTR-9 (mandatory above a turnover of INR 2 crores)
Employee Payroll, Compliance and Taxes:
Most of the Indian subsidiaries are formed in order to support the Parent Company through the manpower and skill available in India. In such a case, it is extremely important to manage their payroll effectively, taking into consideration the prevalent employee laws and applicable taxes.
The applicability of the employment laws is based on the number of employees in the company. Some of the common applicable laws include:
|Type of Legislation||Less than 10 employees||More than 10 employees||More than 20 employees|
|The Payment of Wages Act,1936||YES||YES||YES|
|The Sexual Harassment of Women at Workplace Act 2013||YES||YES||YES|
|Equal Remuneration Act 1976||YES||YES||YES|
|Child Labour Act, 1986||YES||YES||YES|
|The Shops and Establishment Act||YES||YES||YES|
|The State Tax on Professions, Trades, Callings a||YES||YES||YES|
|The Payment of Gratuity Act, 1972||NO||YES||YES|
|The Employees’ State Insurance Act, 1948||NO||YES||YES|
|The Maternity Benefit Act, 1961||NO||YES||YES|
|The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952||NO||NO||YES|
|The Apprentices Act, 1961||NO||NO||YES|
|The Payment of Bonus Act, 1965||NO||NO||YES|
|The Employees’ Pension Scheme, 1995||NO||NO||YES|
|The Employees’ Deposit Linked Insurance Scheme, 1976.||NO||NO||YES|
Some of the common taxes/employee benefits applicable on employee payments are summarized below:
- Income Tax/Withholding Tax/Tax deducted at source: This refers to a certain percentage of Income Tax that an employer is obligated to withhold from the employee’s monthly salary and deposit to the credit of the government. Tax is calculated based on slab rates applicable to individual income levels.
- Employees Provident Fund (EPF): The Employee Provident Fund is an initiative taken to safeguard the social security interests of an employee. Both the employee and employer deduct a certain percentage of the employee’s salary month wise and deposit the same to a designated fund. The current percentage of employers and employee’s contribution is 12% of Salary, respectively. The employee can withdraw his funds after specified number of years or at the time of retirement. The EPF Act is currently applicable to organizations with more than 20 employees.
- Employees State Insurance: The ESI scheme is applicable to establishments with more than 10 employees, having monthly salary not exceeding Rs.21,000/-. The employer and the employee contribution is 4% of Salary, cumulatively.
- Professional Tax: Professional Tax calculation is based on predetermined slabs, on the basis of monthly salary or income levels. It is usually around Rs.200 per month, with the maximum payable in a year being Rs.2500. This amount is deducted from the Salary by the employer and deposited to the account of the concerned state authority.
All of the above taxes and deductions are required to be deposited month wise within a specified time, followed by filing of monthly/quarterly and annual returns to the specific authorities managing the tax/funds.
Transfer Pricing Regulations
If the Indian subsidiary is rendering services/selling goods to the Foreign Holding Company, it would amount to an international related party transaction and be subject to Indian Transfer Pricing rules. In such a case, the invoice value should be at arm’s length price in relation to an international transaction.
The Income Tax Act provides that every person entering into an international transaction or specified domestic transaction shall obtain a report from a Chartered Accountant in the prescribed form and furnish the same to the Income Tax Department. The penalty for failure to furnish a report from a Chartered Accountant in the manner provided above is Rs. 1,00,000.
Income Tax rates in India
Income Tax is chargeable on the net profits of the private limited company. The Income tax rate is 22% plus surcharge and cess which effectively brings the tax rate to 25.17% of the profits.
The tax is charged on the Indian entity and is not upon the shareholders of the company. Hence, the Parent Company will not be charged any tax on the profits earned by the subsidiary. An Annual Income Tax Return has to be filed by the Indian Subsidiary after payments of taxes.
Like all other companies, even foreign subsidiaries have to comply with Indian tax, regulatory and secretarial compliances. VenturEasy, through its expert professionals, provide services to manage such Subsidiary Compliances effectively, so that the companies don’t have to worry about “what to do when” and can get complete guidance on all Indian laws, from time to time.