In today’s interconnected world, businesses are increasingly forming Joint Ventures (JVs) to share expertise, enter new markets, and achieve common business objectives. India, with its growing economy and favorable policies, has become a hotspot for both domestic and international companies to enter into joint venture arrangements.
At Malhotra Rajiv & Co. (MRC), we have assisted several businesses in successfully structuring and establishing joint ventures in India—while ensuring full legal and tax compliance. In this blog, we outline the key legal and tax considerations that businesses should be aware of before setting up a JV in India.
What is a Joint Venture?
A Joint Venture is a strategic partnership between two or more parties who agree to pool their resources for the purpose of achieving a specific business goal. In India, JVs can take various forms, such as:
- Equity-based JV: A new company is formed with shared ownership.
- Contractual JV: Collaboration without forming a new legal entity.
- Foreign company partnering with an Indian company: Often subject to FDI regulations.
Understanding how these activities are taxed—both in India and in the foreign jurisdiction—is essential for legal compliance and avoiding double taxation.
Legal Framework for Joint Ventures in India
Setting up a JV in India involves multiple legal considerations. Here are the key ones:
1. Choosing the Right Structure
The most common structure is a private limited company, where parties hold shares in proportion to their investment. LLPs or partnerships may also be considered depending on the industry and regulatory framework.
2. Drafting the Joint Venture Agreement
A robust JV agreement should clearly define:
- Capital contribution by each party
- Shareholding pattern
- Board structure and decision-making rights
- Profit-sharing arrangements
- Dispute resolution mechanism
- Exit and termination clauses
3. Regulatory Approvals
Depending on the nature of the business and the partners involved, approvals may be required from:
- RBI (for foreign investment under FEMA)
- DPIIT (if the sector falls under the approval route of FDI)
- SEBI (for listed entities)
- ROC / MCA (for company incorporation)
Tax Considerations in Joint Ventures
Proper tax planning is critical for the success of any JV. Some key considerations include:
1. Corporate Income Tax
A JV incorporated as a company is treated as a separate legal entity and taxed accordingly. Currently, domestic companies may avail of reduced tax rates under Sections 115BAA and 115BAB (subject to conditions).
2. Withholding Tax
If one of the JV partners is a non-resident, withholding tax may apply on payments such as:
- Royalties
- Technical fees
- Interest or dividend
Double Taxation Avoidance Agreements (DTAAs) must be referred to for lower withholding rates and credit eligibility.
3. Transfer Pricing Compliance
If the JV or its transactions involve associated enterprises, Transfer Pricing regulations come into play. Pricing of inter-company transactions must comply with arm's length principles, and Form 3CEB must be filed along with documentation.
4. GST and Indirect Taxes
JVs engaging in the supply of goods or services must register under GST and comply with filing and invoicing requirements. Shared input credits, cross-billing between partners, and branch arrangements require careful structuring.
5. Profit Repatriation and Dividend Distribution Tax
India currently does not levy Dividend Distribution Tax (DDT). However, dividend income is taxable in the hands of shareholders. For foreign partners, tax is withheld at the applicable DTAA rate.
Conclusion
Forming a Joint Venture in India is a strategic way to expand business capabilities and enter new markets—but it requires careful planning, regulatory knowledge, and expert execution. Whether you're a foreign investor or a domestic enterprise, aligning with the right consulting firm ensures you build a sustainable and compliant venture.