India stands at the 5th place in the world GDP for 2025. It has turned out to be the world’s largest and fastest-growing economy and provides numerous opportunities to foreign startups who are looking for a larger consumer base. As the country’s middle class is emerging and the digital economy is constantly evolving, the Indian market offers a platform for growth. With over 1 lakh 40 thousand registered startups, India provides a base to reach other Asian countries. With liberalisation in 1991, India opened the gates for foreign ventures to enter the Indian market. The complex and regulatory landscape of India requires careful understanding and consideration before anybody thinks of expanding its business in India. As India is a combination of union and federalism, different laws exist at the national level as well as at the state level. Startups have to ensure that they comply with national and state laws. In this blog, we will dive in-depth to understand the key legal considerations and laws that foreign startups should be aware of when they are thinking of expanding to India.
1. Choose the Right Business Structure
Though India offers plenty of options to foreign investors, selecting the right business structure has its own benefits. as it provides tax efficiency, operational control, and market penetration.
Popular Business Structures for Foreign Startups in India:
- Wholly Owned Subsidiary (WOS): A Wholly Owned Subsidiary is a different altogether legal entity that is fully owned by the foreign parent company. This is the most common structure for foreign startups looking for full operational control in India. The WOS operates as a private limited company or a public limited company, depending on the scale and nature of the business. The WOS is eligible to conduct business in most sectors, and it can operate independently, though it must comply with Indian laws and regulations.
- Joint Venture (JV): It is a temporary business arrangement where two or more parties pool their resources to work on a specific project. Mostly, foreign investors hold 50% to 74% equity in the venture, and Indian partners hold the remaining equity. This business structure is beneficial to the industries as the other partner has the market knowledge and expertise that helps the business get the necessary approvals from the government.
- Branch Office (BO): A branch office is an extension of a foreign parent company in India that operates under its name. It is not a separate legal entity and can only undertake limited activities such as market research, product promotion, and providing technical support. Branch offices allow for a lower-cost market entry and less administrative burden.
- Liaison Office (LO): A Liaison Office (also known as a representative office) can only engage in non-commercial activities like promoting the business, networking, and communicating between the parent company and its customers. Like branch offices, liaison offices cannot engage in revenue-generating activities
2. Foreign Direct Investment (FDI) Regulations
With the liberalization in 1991, India has opened gates for the Foreign Direct Investment (FDI) policies to encourage foreign investment.
FDI Routes in India:
- Automatic Route: In this route, foreign investors do not need any prior approval from the government in industries like manufacturing, IT services, and e-commerce (subject to certain conditions). Foreign startups can proceed with investment without delay, but they must comply with sectoral caps and other regulatory requirements.
- Government Route: There are certain sectors like defence and media and multi-brand retail that require mandatory prior approval from the government of India. Foreign investors need to submit an application to the relevant government body, which will review the application on the basis of its impact on the economy, impact on the local area and population, the overall impact of investment in India, and national security.
3. Intellectual Property (IP) Protection
Intellectual Property (IP) is an important asset for all businesses in the world. It is the IP that separates an idea from the rest of others. The company is recognised by its idea, logo, sign, symbol, and wordmark. As India is a member of the Berne Convention of 1886, the Universal Copyright Convention of 1951, and the agreement of trade-related aspects of intellectual property rights (TRIPs) of 1995, India provides a robust legal mechanism to protect Intellectual property, including patents, trademarks, copyrights, and trade secrets.
- Patents: As India is a signatory to the Patent Cooperation Treaty (PCT), which enables international patent filings, foreign startups can apply for patents in India through the Indian Patent Act of 1970.
- Trademarks: Trademark registration is governed by the Trade Marks Act, 1999 and is managed by the Controller General of Patents, Designs, and Trade Marks (CGPDTM). Registration provides legal protection and exclusive rights to the trademark, which is critical for startups involved in branding and marketing. The process can take 6 months to a year, depending on the complexity of the application.
- Copyrights: Copyright protection in India is granted automatically when an original work is created. For stronger legal protection, especially in case of disputes, registration with the Copyright Office is recommended. The Copyright Act of 1957 governs the protection of literary, artistic, and musical works.
- Trade Secrets: While India does not have a specific law for trade secrets, protection is provided through confidentiality agreements (NDAs) or confidentiality clauses in the agreement. These agreements are carefully drafted to ensure that the business’s important information, like strategies, processes, formulas, and management, is kept protected and confidential. They legally bind the parties to maintain the secrecy of the sensitive information, and a breach of these clauses or agreements is a legal breach of contract that can attract severe legal consequences.
4. Employment and Labor Laws
Indian labour laws are shaped by colonial exploitation, ethical values from the Vedic period, and efforts to address social discrimination. The Constitution of India has empowered both the central and the state governments to enact laws on the subject matter of ‘labour’. Together, both governments aim to protect workers’ rights and ensure safe and fair working conditions across the country.
Whether a startup is based in or out of India, all businesses must comply with the nation’s labour laws. They need to pay special attention to:
- Employment Contracts: The employment contract of foreign startups with Indian employees must clearly outline the terms of employment, salary, job responsibilities, benefits, and dispute resolution mechanisms. Indian labour laws provide strong protection to employees, and therefore, any ambiguity in the labour contract can cause serious problems for foreign startups.
- Minimum Wages: The minimum wage in India varies from state to state. India’s minimum wage laws vary by state and industry. For example:
- In Delhi, the minimum wage for unskilled workers is Rs. 673 per day and for skilled workers, it is Rs. 742 per day.
- In Bihar, the minimum wage for unskilled workers is Rs. 410 per day, and for skilled workers, it is Rs. 519 per day.
Foreign startups must comply with the minimum wage requirements in the state where they operate. Non-compliance can result in legal and financial penalties.
- Employee Provident Fund (EPF): Employers are required to contribute to the Employee Provident Fund (EPF) for employees earning below a certain threshold. This is a mandatory savings scheme designed to benefit employees upon retirement.
- Gratuity: Under the Payment of Gratuity Act, 1972, employers are required to pay gratuity to employees who have completed at least five years of continuous service. This is a lump-sum payment and must be factored into financial planning.
- Termination and Severance: As mentioned above, Indian labour laws are workers’ friendly and provide every means to protect employees from all kinds of oppression. Therefore, any unfair dismissal or termination from employment can attract severe legal consequences.
5. Taxation and Compliance
Indian tax laws are a multi-tier system, which has its own set of compliances. The nature and amount of the tax to be paid in India depend on the organisation’s business structure.
- Corporate Tax: This is a type of tax levied on a company’s income or capital. Foreign startups have to pay corporate tax on income generated in India. The rate varies depending on the size of the company and its turnover.
- Goods and Services Tax (GST): GST is a tax levied on the supply of goods and services in India. It is mandatory for the startups to register for GST if their annual turnover exceeds ₹40 lakh (₹20 lakh in some special category states). With GST, businesses can claim Input Tax Credits (ITC) on the amount of tax paid.
- Double Taxation Avoidance Agreement (DTAA): India has signed Double Taxation Avoidance Agreements (DTAAs) with over 80 countries to help foreign startups avoid being taxed twice on the same income. DTAAs provide relief in the form of tax credits or exemptions for taxes paid in the home country.
- Tax Filing and Documentation: Foreign startups have to ensure that they stay compliant with the nation’s tax laws. Any non-compliance with tax laws can lead to hefty penalties by the government of India. In the case of repetitive failure or non-compliance, a business can be shut down.
6. Regulatory Approvals and Licenses
Before launching operations in India, foreign startups must obtain several regulatory approvals and licenses, which may vary based on the industry.
- Business Registration: Foreign startups must register with the Ministry of Corporate Affairs (MCA) and obtain a Certificate of Incorporation. Documents like the Memorandum of Association (MoA) and the Articles of Association (AoA) and details of the directors of the company need to be submitted to the MCA.
- Industry-Specific Licenses: In order to operate businesses in India, certain licenses are required:
- Food startups have to obtain a license from the Food Safety and Standards Authority of India (FSSAI).
- Financial services firms must register with the Securities and Exchange Board of India (SEBI).
- Pharmaceutical companies must comply with regulations set by the Central Drugs Standard Control Organization (CDSCO).
- Import/Export Licenses: If the foreign startup intends to import or export goods, it must obtain an Importer Exporter Code (IEC) from the Directorate General of Foreign Trade (DGFT).
7. Dispute Resolution and Legal Recourse
India offers several mechanisms for resolving disputes:
- Arbitration: India is a signatory to the New York Convention on International Commercial Arbitration. Lately, Arbitration has become a preferred method for resolving disputes in commercial contracts. India’s Arbitration and Conciliation Act of 1996 provides a framework for resolving disputes efficiently, particularly in international cases.
- Indian Courts: While arbitration is preferred for commercial disputes, foreign startups can also seek legal recourse through Indian courts. However, the judicial process in India can be slow due to a backlog of cases.
- Alternative Dispute Resolution (ADR): India has also adopted alternative dispute resolution mechanisms such as mediation and conciliation to resolve disputes more efficiently and cost-effectively.
Conclusion
India is a socialist-democratic nation that believes in the overall development of the nation, and corporations in India carry responsibility towards the upliftment of its people. Entrepreneurs who are planning to enter India need to understand the foundation of existing laws. These laws are formulated to protect the weaker section of society against big corporations. It is advisable to consult an expert who is well-versed in legal complications involved in expanding business in India.
FAQs
1. What is the easiest business structure for a foreign startup to set up in India?
A Wholly Owned Subsidiary (WOS) is often the easiest and most flexible structure for foreign startups as it provides full control over operations in India.
2. Are foreign investors required to obtain government approval for investments in all sectors in India?
No, government approval is only required for investments in certain sectors like defence and media.
3. How long does it take to register a trademark in India?
Trademark registration in India can take between 6 months to 1 year, depending on the complexity of the application.
4. Is it mandatory for foreign startups to register for GST in India?
Yes, foreign startups have to register for GST if their turnover exceeds the prescribed threshold.
5. Can foreign startups use arbitration to resolve disputes in India?
Yes, arbitration is widely used for dispute resolution in India, whether foreign or Indian.
6. What are the key benefits of establishing a joint venture in India?
A joint venture allows foreign startups to leverage local expertise and networks while sharing the risks and rewards with an Indian partner.
