Starting a business in India

1. Introduction

India continues to emerge as a compelling destination for businesses across the globe, fuelled by a confluence of economic, demographic, and policy-driven advantages. With its vast consumer base of over 1.4 billion people, the country offers unparalleled market potential across sectors. India’s rich and diverse talent pool, improvement in ease of doing business benchmarks, lucrative investment opportunities, digital governance initiates and various other Government schemes position India, not only as a market to enter, but as a strategic hub for long-term expansion and innovation.

One of the critical elements of evaluation before starting operations anywhere in the world is the labour and employment law structure and the trends around workforce management. When it comes to labour and employment, the Indian Constitution provides both the Central government and the respective State governments powers to legislate and implement laws and regulations. While the overall relationship between an employer and employee is typically governed by Central legislations (e.g. disputes, employee classifications, harassment etc), the operational part of the relationship is generally addressed by State laws (e.g. working hours, overtime, leaves, holidays etc).

One of the major developments in the labour and employment space in recent times has been the Government’s effort to codify, simplify and amalgamate 29 central legislations into 4 standalone Labour Codes (“Codes”). The Codes are yet to be brought into effect. We have discussed the Codes in Section 5 below. Additionally, it is also important to note various state government such as Karnataka and Rajasthan have introduced laws for regulating the engagement of gig workers in the State. These State specific laws have not been brought into effect yet.

Khaitan & Co is a multi-speciality law firm, with offices in Ahmedabad, Bangalore, Delhi, Mumbai, Kolkata, Pune, Chennai and Singapore. We have a market-leading dedicated Employment, Labour and Benefits Practice Group that is highly experienced in advising foreign corporations in entering Indian markets and setting up their local operations across the country. We assist and advise on all aspects of employment law, including dispute resolution, transactional, advisory matters, and day to day statutory compliances. The Team also assists them with management of employment risks at all levels in addition to providing strategic, board-level advice on crucial employment related and compliance issues, and variety of other services ranging from drafting contracts, organisational policies, conducting standalone internal disciplinary procedures, conducting compliance audit exercises, assisting with collective bargaining negotiations providing exhaustive legal opinions on specific points of employment law and assisting the HR and IR departments and in-house counsels of businesses with their day-to-day  operations and management.

We have provided an indicative list of compliances below which will assist any employer in evaluating the legal and regulatory framework for commencing business operations in India. While we have attempted to cover the significant requirements under the Central laws and some of the common requirements under all State laws, this is however not an exhaustive list and there are additional requirements for businesses in different States or sectors.

2. Labour and Employment Law Requirements

Background – Categories of Employees

Indian labour and employment legislations categorise employees into ‘workmen’ and ‘non-workmen’. The service conditions of workmen employees are subject to far greater statutory protection under Indian law. Non-workmen employees are typically employees in managerial and administrative roles. The service conditions of non-workmen are predominantly governed by the terms of their employment contracts and internal policies of the organisation. However, there a few state-specific legislations that also govern the terms of employment of non-workman employees.

While the Industrial Disputes Act, 1947 (“ID Act”) defines a ‘workman’, determining whether a particular employee is a workman or not, has to be undertaken on a case-by-case basis. Various judicial precedents have laid down that in order to determine an employee’s status as a ‘workman’, the actual, substantial and predominant work being performed by her/him is decisive rather than the employee’s remuneration, education or designation. The other factors that are useful to determine whether an employee is a workman or a non-workman, is by taking into account whether the employee had any managerial responsibilities and whether she/he had any authority to take any decision on behalf of the employer.

Employers are generally required to undertake certain additional statutory compliances with respect to their workmen employees. While the terms of service of non-workmen are ordinarily governed by the terms of the employment contracts and the internal policies of the organisation, certain State specific shops and establishments legislations (“S & E Act”) also regulate the service conditions of non-workmen employees. Additionally, there are other legislations which cover both categories of employees. These legislations address topics such as prevention of sexual harassment at the workplace, maternity benefits, equal opportunity principles, payment of post-retiral benefits and rights of transgender persons.

 

Compliances

An indicative list of the compliance requirements having a universal character have been listed below.

 

• State specific shops and establishment registrations for businesses.
• Certain statutory filings and record keeping obligations provided under the S & E Act.
• Compliances under legislations such as: (a) the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952; (b) the Employees’ State Insurance Act, 1948; (c) the Equal Remuneration Act, 1976; (d) the Maternity Benefit Act, 1961; (e) the Minimum Wages Act, 1948; (f) the Payment of Gratuity Act, 1972; (g) the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act; (h) the Payment of Bonus Act, 1965; (i) the Payment of Wages Act, 1936; (j) applicable professional tax legislations; (k) the Rights of Persons with Disabilities Act, 2016; (l) the Transgender Persons (Protection of Rights) Act, 2019; (m) the Human Immunodeficiency Virus and Acquired Immune Deficiency Syndrome (Prevention and Control) Act, 2017.
• Issue of offer letters, employment contracts and/or non-disclosure agreements that are equitable in nature and don’t impose conditions that are viewed by courts in India as unnecessary and burdensome obligations on the employees.
• With respect to internal policies of the organisation, an employer would typically be expected to have in place a code of conduct/employee handbook, equal opportunity policy for persons with disabilities, leave policy (including policy on maternity leave), anti-sexual harassment policy and protection of transgender persons policy, policy for protection of person affected by HIV/AIDs. amongst other policies and procedures. Depending on state specific requirements and employee threshold, companies may also need to prepare standing orders for their employees and obtain certification for it, in compliance with the requirements of the Industrial Employment (Standing Orders) Act, 1946.
• An employer would do well to put in place robust processes governing whistle-blowers, acts of misconduct and investigations surrounding such matters. Certain regulated organisations in India such as listed companies, companies which accept deposits from the public, or companies which have borrowed money from banks and public financial institutions in excess of fifty crore Indian Rupees are mandated under law to have a whistle-blowing mechanism in place.
• Working conditions and benefits as prescribed under Central and State laws.

3. Corporate Law Requirements

Incorporation

Employers seeking to establish operations in India often do so through the incorporation of a private limited company, though there are a number of other available corporate structures. The incorporation of a private limited company in India is a step-by-step process involving the following compliances under the Companies Act, 2013:

• Every private limited company in India must have at least 2 directors on the board, but no more than 15 directors. One of the directors is required to be a resident of India. The directors need to be identified and a Director Identification Number, which is issued by the Registrar of Companies (ROC), needs to be obtained for such directors (if they do not already have one). A Digital Signature Certificate also needs to be obtained for each of the directors of the Company. There is no minimum and maximum capital requirement for the incorporation of a private limited company. Separately, a company is required to have at least 2 shareholders at all times, who shall be the subscribers to the charter documents.
• The name of the proposed company needs to be approved by the ROC.
• The charter documents and e-forms must be drafted and filed with the ROC, along with other statutory forms disclosing relevant details such as the first directors of the company, consent of such directors to act as directors, criminal/conviction history of the directors, registered office address of the company.
• Statutory forms and other necessary documents need to be filed in respect of the foreign investments in the company (if any) with the authorised dealer banks and the Reserve Bank of India which is India’s central bank.
• While applying for the registration, an employer can also apply for the allotment of PAN (Permanent Account Number- required for tax filing purposes) and TAN (Tax Deduction Account Number- required for deducting tax at source for employees and other third parties).

 

KHAITAN & CO  provides assistance and advice on all issues arising under the Companies Act, 2013 as well as the foreign exchange laws in India (including matters such as the approvals for investments, mode of investments, structuring of investments, filing of statutory forms, maintenance of statutory registers and records, obtaining certifications, licenses and permits) ensuring continuous compliance with all requirements thereunder.

 

Post Incorporation Registrations

Once the entity is incorporated, certain registrations will be necessary for various operational purposes. Listed below are the common post-incorporation registrations required in India. There could, of course, be some variations depending on the exact nature of business.

• Goods and Services Tax (GST) registration for payment of taxes in respect of sale of goods and/or provision of services.
• Professional Tax registrations in each of the concerned states in respect of tax deductions made from payments made to employees in such states.
• Import and Export Code for carrying on the import or export of goods.
• Registrations/licenses under applicable labour and employment legislations.

KHAITAN & CO has the required expertise to assist and advise your organisation in the procurement of the required licenses and permits.

4. Payroll and Benefits Providers

In India, the vast majority of smaller employers outsource payroll and benefit responsibilities to third party companies. Larger employers however have their own internal teams processing payroll and are responsible for all related compliance requirements. Depending on your preference, we would be happy to recommend payroll providers to fit your business requirements.

 

5. Other Considerations

Labour Codes

India’s labour and employment law landscape is undergoing one of its most significant transformations in decades. For businesses looking to establish operations in the country, keeping pace with these developments is fundamental to legal compliance, risk management, and operational success.

In an effort to simplify compliances for employers, 40 Central labour and employment-related legislations are being consolidated in 4 Labour Codes:

• The Codes are Code on Wages, 2019;
• The Occupational Safety, Health, and Working Conditions Code, 2020;
• The Industrial Relations Code, 2020; and
• The Code on Social Security, 2020.

The Codes propose to take effect on a federal level, ensuring uniformity in its application and each of the Codes will have corresponding rules. Further, respective States are also in the process of notifying separate rules under each of the Labour Codes.

Why the Labour Codes matters for new businesses:

• Uniform definitions will reduce ambiguity across states.
• Digital compliance portals are expected to simplify reporting.
• Broader social security coverage could affect cost structures.
• Provision of social security benefits to non-traditional workers
• Greater security and benefits for fixed term employees
• State level reforms

KHAITAN & CO assists foreign corporations in structuring their entry and employment models in India. We will be pleased to offer our services to assist your organisation in commencing its operations in India.