Volume 4, Issue 9

20th December, 2012

Business Alert
Key Challenges faced by Indian Liaison Offices in an inquisitive Tax & Regulatory Environment

A.    Indian Income Tax perspective

  1. Roving inquiries

In what could be viewed as an information gathering exercise, Liaison Offices (‘LO’) are now required to file form 49C with the Indian income tax authorities.  Form 49C requires LOs to disclose information of their top distributors / agents in India, revenues earned by the Head Office in India, operations of other group companies having operations in India, etc.  Accordingly, detailed review of information relating to Indian operations, identification of relevant information and manner of presentation thereof needs careful analysis

  1. Tax scrutiny – recent trends

The past 2 months has witnessed numerous Los receiving notices from Indian tax authorities seeking information dating back to past 5 years.  The details requested for and documentary evidences asked for are plenty and the manner of responding to such notices is critical to ensure no adverse tax consequences flow to the group as a whole

  1. Tax litigation

Traditionally, LOs have been viewed as a safe option to establish a preliminary Indian business presence with minimalistic tax implications / compliances.  However, there have been numerous tax litigations in the recent past around foreign companies operating in India as representative or liaison offices.  This has resulted in increasing litigation involving Indian LOs, notably in the apparel & service sectors.  Accordingly, analyzing the roles & responsibilities, advising on document execution, advising on establishing standard work flow, examining correspondences between various parties, etc upfront is the need of the hour

B.    Indian Regulatory perspective

  1. Additional reporting to DGP

In a recent requirement of the Reserve Bank of India (‘RBI’) LOs are now required to file various details with the DGP of the state in which the office is established.  Some of the details relate to the foreign employees of the LOs and the persons who visit India in connection with the operations of the LOs.  One is currently uncertain on how this information will be used and the implications involved on inadvertent non compliances of such formalities which include sharing of personal contact information and visa related information of foreign employees in India

  1. Non compliances / delayed compliances

LOs are required to comply with various regulatory & exchange control formalities, non compliances (or delayed compliances) of which could trigger significant penal consequences.  Accordingly, identifying past non compliances, carrying out FEMA diagnostic review and approaching the RBI suo motu might significantly lower the penal exposure and bring closure to risks associated with such non compliances

C.    Way Forward

  1. Should foreign companies migrate to a safer or more certain structure such as Subsidiary?


  1. Build in adequate safeguards in operating within the LO structure – a fact specific exercise?

In order to understand the above in a greater detail, we have organized a workshop on 10 January 2013 in Mumbai. Interested participants are requested to register themselves here : http://www.skpgroup.com/htms/skp_register.asp
The venue for the workshop will be intimated to all the registered participants in due course.