UK E-commerce Businesses Expanding to India: Legal Setup Guide

India has a large consumer base with fast-growing digital payments and online purchasing systems. For a UK-based business, the opportunity for growth from operating in the Indian market is large, but there are legal and regulatory barriers when considering operating in that market.

There are a number of considerations for a UK e-commerce business beyond just creating a website in English with the Henderson Convention Center and shipping products to consumers in India. The company may need to incorporate an Indian legal entity, obtain foreign investment permits and report foreign operations, register for and pay Indian taxes, set up a local Indian bank account, comply with local labor laws, and obtain specific business permits.

This document provides an overview of the key issues a UK e-commerce business should consider before operating in India.

1. Choose the Right Business Structure

The first thing to consider is how the UK business will operate in India.

Different market-entry models are explored by foreign companies based on their activities, investment structure, and business goals. Long-term businesses often create an Indian subsidiary in the form of a private limited company to incorporate a separate Indian legal entity.

A private limited company subsidiary allows the UK parent company to set up local operations, hire staff, open an Indian bank account, and carry on business within India.

The appropriate structure is determined after evaluating:

1. The nature of e-commerce activities
2. Foreign investment rules
3. Ownership requirements
4. Tax implications
5. Expected turnover
6. Hiring plans
7. Import and export activities
8. Payment and distribution model

Incorporation costs play a role in structuring a business; however, other factors such as legal and tax consequences of the structure should be considered as well.

2. Understand FDI and FEMA Requirements

The Foreign Exchange Management Act (FEMA) and India's FDI framework govern foreign investment in India.

Rules pertaining to Indian operations of UK e-commerce businesses depend largely on the specifics of their business model.

For example, the regulatory frameworks for an inventory-based e-commerce model and a marketplace model are likely to be different, with some activities in each model possibly requiring industry-specific conditions.

When a UK parent wishes to invest in an Indian company, it must determine:

1. If the intended activity allows for foreign investment
2. What is the FDI route for the activity
3. What are the industry-specific conditions and frameworks
4. What are the pricing and valuation rules
5. What are the reporting requirements
6. What are the permitted instruments of investment
7. What are the constraints imposed on the business model and the investment

It is advisable to seek the assistance of a lawyer who practices FEMA and other related laws before making the investment, as it is difficult to unwind an incorrectly structured investment at a later date.

3. Prepare Foreign Parent Company Documents

When a UK company incorporates in India, we may need to provide documents relating to the UK company.

Examples of such documents are:

1. Certificate of Incorporation of the UK company
2. Constitutional documents
3. Board resolution authorizing the Indian investment
4. Details of directors and shareholders
5. Proof of registered office
6. Authorization of representatives
7. Identification and address documents of such persons

Documents executed outside of India may need to undergo authentication, notarization, Apostille, or consular attestation, depending on the document and the reciprocating jurisdiction's requirements of incorporation.

The incorporation application may be processed only after confirming the exact documents to be produced. This is to avoid any unnecessary delays.

4. Incorporate the Indian Private Limited Company

An Indian private limited company works well as a local business structure for several foreign businesses.

The process for setting up a private limited company includes choosing a name, preparing documents for incorporation, and filing with the Ministry of Corporate Affairs.

This process includes:

1. Choosing a company name
2. Finding shareholders and directors
3. Getting Digital Signature Certificates (DSC)
4. Applying for Director Identification Numbers (DIN)
5. Preparing the constitutional documents of the company
6. Filing for incorporation
7. Submitting the registered office
8. Receiving the Certificate of Incorporation

A foreign parent company must make sure that the proposed ownership and directors fulfill the requirements of India.

5. Arrange PAN, TAN and GST Registration

Upon incorporation, a company should assess its tax registrations and obligations.

The company will need a PAN for all tax-related activities, but will need a TAN for tax deduction and collection only if the company has tax deduction obligations.

GST registration is important for e-commerce companies because the treatment of GST can vary based on the products and services sold, the sales channels, the location of the customers, and the business model of the company.

The company must put in place a proper process for GST, which includes:

1. issuance of tax invoices
2. collection of GST
3. input tax credit
4. filing of GST returns
5. reconciliation of sales records
6. The company must also put in place a proper process for:
7. inter-state supplies
8. e-commerce transactions

A company must understand that not all online transactions attract the same treatment of GST.

6. Check E-commerce and Tax Regulations

Establishing a company is just the first step to operating a business.

E-commerce businesses in India need to account for consumer protection laws, disclosure requirements for pricing and products, terms for refunds and cancellations, data laws, regulations on advertising, and other bills and acts.

Tax planning is important, and the structure and activities of the business will determine if the business has corporate taxes, GST, withholding taxes, and other taxes in India.

The UK parent company must review if the services, technology, intellectual property, and management support provided by the UK company to the Indian subsidiary are documented and priced properly.

7. Set Up Indian Banking and Payment Collection

Establishing an Indian entity means certain banking requirements become applicable.

It is likely that the company will require an Indian current account to conduct business within India, pay employees and vendors, and generate transactions and operational expenses within India.

An online business will need to consider payment collections and determine how it will accept payments from customers within India, where it will receive those payments, and how it will document accompanying transactions with the UK parent.

Money transferred between the UK parent and the Indian subsidiary must be routed through the banking system and remittance controls within India in accordance with the Foreign Exchange Management Act (FEMA).

8. Plan Employment and Payroll Compliance

A UK e-commerce company hiring staff in India has to become acquainted with the local employment laws.

Based on the workforce and location, compliance may consist of:

1. Employment contracts
2. Payroll processing
3. Tax deductions
4. Provident Fund
5. Employee State Insurance
6. Professional tax
7. Leave and wage requirements
8. Applicable state employment laws

Outsourcing payroll and accounting is a good option for a newly established subsidiary, and for the UK management team that is not familiar with Indian employment and tax laws.

9. Review Import and Export Requirements

There may be additional rules if the company wishes to import products to India.

The company should determine if an Import Export Code (IEC) is necessary and check customs duties, classify products, complete the necessary documentation, affix the appropriate labels, and understand the other requirements for importing.

There are product categories that contain additional requirements. Therefore, the review of compliance should be based on the actual products being sold, as not all e-commerce businesses should be treated the same.

10. Maintain Ongoing Indian Compliance

The compliance process continues after incorporation.

An Indian subsidiary requires ongoing management of corporate, tax, and regulatory filings. This may include:

1. MCA filings
2. Preparing and filing annual financial statements
3. Income tax returns
4. GST returns
5. Compliance with tax deducted at source
6. Bookkeeping and accounting
7. Statutory audits
8. Reporting pursuant to FEMA
9. Compliance with payroll requirements
10. Compliance with requirements to maintain statutory records

There are consequences for failing to make recurring filings. The cost, penalties, and problems with compliance arising from such failures require that a compliance calendar be prepared by the UK parent from the time an Indian subsidiary is incorporated.

When Should a UK E-commerce Business Take Professional Help?

Particular kinds of expertise are needed when a business deals with foreign investment, company incorporation, GST, FEMA, taxation, employment, and cross-border transactions.

While the UK management team handles the product and market, a specialist can take care of the incorporation, documentation, registrations and compliance, and tackle recurring issues.

It is crucial for a business's first impression in India to get the legal and compliance framework right to avoid issues down the road.

Conclusion

UK E-commerce Businesses entering the Indian market will have to do more than locate customers and create a store to be successful. The business will need to develop a legal structure, manage foreign investments, register for taxes, set up a bank account, and create a system to manage ongoing compliance.

An Indian subsidiary is one option for a longer-term business structure for UK companies; however, this should be assessed against the company's business model and regulatory requirements.

If thoroughly planned, UK companies can systematically set up their Indian operations and manage legal, tax and compliance matters themselves from the outset.

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FAQs

1. Can a UK e-commerce company expand its business to India?

Yes, UK e-commerce companies can operate in India by selecting an appropriate business structure and working within the confines of Indian company law, FDI, FEMA, taxation, GST and e-commerce laws.

2. Does a UK e-commerce business need an Indian subsidiary to operate in India?

No, it is not necessary to set up an Indian subsidiary. The structure can be a private limited company if the company intends to have a long-term, local presence.

3. What are the FDI and FEMA requirements for a UK e-commerce company in India?

The rules will be contingent upon the e-commerce model, the degree of foreign ownership, and the proposed business activities. The business will have to evaluate the applicable FDI routes, sectoral provisions, foreign exchange rules, and report the investment prior to making the investment.

4. What registrations does a UK e-commerce company need in India?

Based upon the activities of the company, incorporation of the company in India will be required, along with a PAN, TAN, GST registration, and a bank account, as well as other business licenses and permits. An Import Export Code (IEC) will be required for goods import.

5. What ongoing compliances does an Indian subsidiary of a UK e-commerce company have?

An Indian subsidiary will have to comply with MCA filings, GST returns, income tax compliance, TDS, accounting, audit, FEMA reporting, and payroll compliance, among others.