Outsourcing to India

Arjun Aiyar of the Rights Lawyers takes a look at the legal issues surrounding the setup of your own company in India to manage technical work from there.

Tags: IndiaService level agreementTaxThe Rights Lawyers
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By  Arjun Aiyar Published  October 11, 2009

In today's tough economic climate, companies are looking to cut costs and one of the obvious ways which has been popular for some time has been to outsource your key functions to an offshore jurisdiction. Costs are an important consideration in whether to outsource or not, and the other key issue which all companies should be mindful of is the need to maintain the highest quality of services.

For some time, India has been one of the key jurisdictions to which companies look to outsource their IT functions. India offers both a cost advantage as well as a ready pool of qualified manpower. When considering whether to outsource to India, there are two options that you can look at, the first being the ability to outsource to an existing service provider. The second option is to set up your own company in India.

With the second option, you will be able to maintain a greater degree of control regarding the level of quality.  Companies that have used this particular avenue include General Electric, American Express and British Telecom amongst others.

The government allows foreign companies and individuals to hold 100% of the shares in Indian companies in most industries.  The cost of setting up in India is not particularly high, though companies will have to be prepared to incur certain costs on an annual basis to maintain statutory compliance.

Indian authorities levy both direct and indirect taxes on businesses.  Contracts in India have to be tax compliant and it is advisable to get relevant tax advice before entering into any agreement. In the case of outsourcing, the tax authorities view the holding company of an outsourcing company in India as third party. The tax authorities are concerned that foreign companies are setting up outsourcing businesses in India in order to lower their tax burden (the technical term for doing this is transfer pricing).

It is therefore critical that you have a good services agreement between the Indian company and the holding company. In order to avoid paying penalties and fines in respect of transfer pricing it is important that the service agreement clearly specifies what services the Indian company is undertaking on behalf of the holding company. It is also important that a fair market value is charged for the services being provided to the parent company on an arms length basis. Finally, it must be pointed out that there is a significant need to obtain appropriate legal, financial and tax advice prior to outsourcing your business to India.

You would also need to ensure that you are compliant with other Indian laws.  Commercial office space is governed by the ‘Shops and Establishments Act' and there may be labour law implications in respect of hiring people in India, though most contracts dealing with white collar jobs are governed by the law of contract.  The states in India also levy taxes on certain types of transactions.

While some of the compliance requirements set out above may seem onerous, most companies that have outsourced their operations to India have adapted to conditions by ensuring that they obtain appropriate legal and financial advice prior to setting up their businesses in the country.  What is clear, however, is that the advantages that outsourcing to India provides far outweighs any administration that it may bring along with it.  The success of the Indian outsourcing story is now two decades old and looks set to continue succesfully now and well into the future for many generations.

Arjun Aiyar is a solicitor with the Rights Lawyers.

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