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Relocating a business to India offers access to a large consumer base, skilled workforce, and expanding digital infrastructure. At the same time, foreign enterprises face a dense tax and regulatory environment where compliance obligations arise from the first day of presence. Indian authorities increasingly rely on integrated data analytics across income tax, GST, and foreign exchange systems, allowing inconsistencies to be identified even years after operations commence.
Risks related to taxes and regulations during relocation are rarely isolated. The same initial structuring choices frequently result in foreign exchange breaches, transfer pricing conflicts, permanent establishment exposure, and withholding tax difficulties. Early alignment between operational reality and regulatory requirements is crucial since penalties for non-compliance might approach 300 percent of the tax involved. Therefore, proactive risk identification is not a regulatory formality but a commercial need.
Permanent establishment risk is the most common trigger for unexpected corporate tax exposure when foreign businesses relocate to India. Under domestic law and applicable tax treaties, a permanent establishment arises where a foreign enterprise maintains a fixed place of business in India or operates through a dependent agent who habitually concludes contracts on its behalf. Once triggered, profits attributable to Indian operations become taxable in India.
During relocation, permanent establishment exposure frequently arises from:
Even in the absence of a registered office, digital and service based businesses may create nexus where Indian teams exercise control, oversight, or decision making authority.
The Supreme Court’s 2025 ruling in the Hyatt International case reinforced this position. The Court held that repeated employee oversight and operational control over Indian hotel operations constituted a fixed place permanent establishment under the India UAE tax treaty, despite the absence of a formal office. The ruling resulted in tax demands on management fees earned offshore and highlighted the importance of substance over legal form.
Foreign companies are taxed in India on income that accrues or is deemed to accrue in India under the Income Tax Act, 1961. From assessment year 2025 26, the base corporate income tax rate for foreign companies stands at 35 percent, reduced from 40 percent, with applicable surcharge and a 4 percent health and education cess.
Relocation related risks typically arise from the operating structure chosen. Branch operations attract higher effective tax rates and face restrictions on profit repatriation. Subsidiary structures offer greater flexibility but require careful alignment between functions, assets, and risks to avoid profit recharacterization during audits.
India’s tax enforcement intensity continues to rise. Provisional net corporate tax collections for FY 2023 24 reached approximately USD 109 billion, reflecting increased scrutiny of foreign enterprises and cross border arrangements. Minimum Alternate Tax exposure, incentive eligibility, and evolving judicial interpretations further complicate one time planning approaches.
Relocating businesses frequently make outbound payments for technical services, royalties, interest, and intellectual property usage. These payments trigger withholding tax obligations under Section 195 of the Income Tax Act and represent a recurring compliance risk.
Common risk areas include:
Non-compliance often leads to disallowance of expenses, interest liability, and secondary tax exposure for the Indian entity.
Digital business models face additional exposure under the equalisation levy regime. A 2 percent levy applies to specified digital advertising and e commerce transactions above prescribed thresholds, independent of permanent establishment.
| Payment Category | Base Withholding Rate (plus cess) | Treaty Relief Availability |
|---|---|---|
| Royalties and technical fees | 10 percent | Lower rates under DTAA |
| Dividends | 20 percent | Usually,5 to 15 percent |
| Interest | 20 percent | Commonly 10 to 15 percent |
India maintains one of the most actively enforced transfer pricing regimes globally. All cross-border transactions between related parties must comply with the arm’s length principle and be supported by contemporaneous documentation.
Relocation increases exposure where business models rely on shared services, intellectual property licensing, cost sharing arrangements, or intercompany financing. Authorities frequently challenge benchmarking studies, selection of comparables, and transaction characterisation.
Penalties apply not only to income adjustments but also to documentation failures, including penalties of up to 2 percent of the transaction value.
Judicial scrutiny remains intense. In 2024, the Delhi High Court in the SABIC India case rejected an aggressive adjustment proposed by tax authorities and reaffirmed the importance of consistency and OECD aligned methods. Despite such rulings, litigation remains common and prolonged, with double taxation risks where corresponding relief is unavailable.
The Goods and Services Tax (GST) applies to most supplies of goods and services with an Indian nexus. Relocation often triggers GST registration due to warehousing, local fulfilment, or customer facing services. Applicable tax rates range from 5 percent to 28 percent depending on classification.
Key GST related risks include:
Audit findings highlight the enforcement environment. Government audit reports identified hundreds of deviations amounting to significant revenue exposure, while automation increasingly flags discrepancies and blocks refunds. Interest at 18 percent applies on delayed payments, compounding financial impact.
Foreign exchange compliance under the Foreign Exchange Management Act, 1999 governs capital infusions, intercompany loans, remittances, and exit transactions. Procedural lapses are common during relocation and frequently result in penalties.
Typical risk areas include delayed reporting of capital contributions, valuation disputes in share issuances or transfers, and non-compliant downstream investments. FEMA penalties can extend up to three times the amount involved, with additional penalties for continuing contraventions.
Judicial precedents confirm strict enforcement. In certain cases, penalties exceeding USD 1.8 million have been upheld for remittance related violations. FEMA non-compliance also disrupts tax positions by blocking dividend payments and exit proceeds. Compounding mechanisms offer relief but require timely disclosure and corrective action.
Relocation triggers compliance obligations under Indian labour laws, including provident fund contributions, gratuity, minimum wage regulations, and state specific registrations. Expatriate employees may face dual social security exposure without appropriate planning.
Sector specific regulation adds further complexity. Financial services, fintech, pharmaceuticals, and manufacturing require additional approvals from regulators such as RBI, SEBI, or sectoral ministries.
The Digital Personal Data Protection Act of 2023 is mandatory for digital businesses. The law requires governance measures, consent-based data processing, and breach notification. Depending on the type and seriousness of infractions, the penalty can reach INR 250 crore.
Relocating a business to India exposes foreign enterprises to a tightly interconnected set of tax and regulatory risks. Permanent establishment exposure, corporate income tax scrutiny, withholding tax failures, transfer pricing enforcement, indirect tax compliance, foreign exchange regulation, and sector specific obligations frequently arise from early structuring decisions.
Businesses that approach relocation with integrated tax planning, disciplined compliance systems, and continuous regulatory monitoring are better positioned to operate sustainably. In India’s data driven enforcement environment, aligning operational substance with legal and tax frameworks from the outset remains the most effective safeguard against long term exposure and uncertainty.
