Accounting & Bookkeeping for Foreign-Owned Companies in India

Introduction

For any foreign entrepreneur, investor, or multinational corporation establishing a presence in India, the accounting and bookkeeping function is not just a back-office activity — it is the foundation that every statutory compliance, tax filing, and board report depends on. India's regulatory environment demands meticulous financial record-keeping, and the consequences of getting it wrong range from monetary penalties to criminal liability for directors.

Foreign-owned companies face an additional layer of complexity: while the Indian subsidiary must comply with Indian accounting standards and the Companies Act, the foreign parent company needs financial information in its own reporting framework for consolidation. Managing this dual requirement efficiently — without duplicating work or creating reconciliation nightmares — requires an accounting partner who understands both sides.

This page covers everything you need to know about maintaining proper books of account for a foreign-owned company in India: the legal requirements under the Companies Act 2013, the applicable accounting standards (Ind AS vs. Indian GAAP), the TDS compliance framework that is deeply interlinked with bookkeeping, and the practical aspects of producing monthly reporting packages for a foreign parent company.

What Is Accounting & Bookkeeping for Indian Companies?

Accounting and bookkeeping for an Indian company encompasses the systematic recording, classifying, and summarizing of all financial transactions in compliance with the Companies Act, 2013 and applicable accounting standards. The legal basis is Section 128, which mandates that every company shall prepare and keep at its registered office books of account and other relevant books and papers that give a true and fair view of the state of affairs of the company.

The books must be maintained on the accrual basis (revenue and expenses recognized when earned or incurred, not when cash is received or paid) and according to the double-entry system of accounting. This is not optional — it is a statutory requirement. Cash-basis accounting, which some small businesses use in other countries, is not permitted for companies registered under the Companies Act.

The scope of "books of account" includes: general ledger, cash book, journal, purchase and sales registers, fixed asset register, inventory records, bank reconciliation statements, and all supporting vouchers and documents. For companies with branch offices (in India or abroad), the branch must maintain its own books, and periodic summarized returns must be sent to the registered office.

Eligibility & Requirements

Every company registered under the Companies Act, 2013 — whether a private limited company, public limited company, one person company, or Section 8 company — must maintain proper books of account. There is no exemption based on size, turnover, or ownership structure. Foreign-owned subsidiaries, wholly-owned subsidiaries, and joint ventures are all subject to the same requirements.

Applicable Accounting Framework

The accounting framework your Indian subsidiary must follow depends on its size and listing status:

• Ind AS (Indian Accounting Standards) — Mandatory for all listed companies (regardless of net worth), all unlisted companies with net worth exceeding INR 250 crore, and all subsidiaries, associates, and joint ventures of companies already applying Ind AS.
• Indian GAAP (Accounting Standards notified under the Companies Act) — Applicable to all other companies not required to follow Ind AS. This covers the majority of small and mid-size foreign-owned subsidiaries in India.

Important: If a foreign parent company is listed in India (rare but possible), or if the Indian subsidiary itself becomes large enough (net worth > INR 250 crore), Ind AS becomes mandatory. Once Ind AS becomes applicable, the company cannot revert to Indian GAAP.

Ind AS vs. IFRS — Key Differences for Foreign Parent Companies

Ind AS is converged with IFRS but includes several India-specific modifications (carve-outs). Key differences include:

These differences mean that an Indian subsidiary's Ind AS financial statements will not be identical to what the parent company expects under full IFRS. A reconciliation bridge is needed for each reporting period.

Step-by-Step Process

Step 1: Setting Up the Accounting Foundation

Before the first transaction is recorded, the accounting foundation must be established:

1. Chart of Accounts Design — Create a chart of accounts that maps to both Schedule III of the Companies Act (which prescribes the format of Indian financial statements) and the parent company's group COA. Each Indian statutory account gets a mapping code to the parent's account.
2. Accounting Policy Documentation — Document the subsidiary's accounting policies covering revenue recognition, depreciation methods, inventory valuation, foreign currency translation, employee benefits, and provisioning. These policies must comply with the applicable Indian accounting framework.
3. Software Configuration — Set up the accounting software with Indian GST tax codes, TDS sections, state codes, and multi-currency capabilities.

Step 2: Daily Transaction Processing

The bookkeeping cycle involves:

• Purchase recording — Vendor invoices are recorded with correct GST classification (intra-state CGST+SGST, inter-state IGST, reverse charge, or exempt). TDS applicability is checked for every payment — Section 194C for contractors, 194J for professionals, 194I for rent, 195 for payments to non-residents.
• Sales recording — Customer invoices are raised with correct HSN/SAC codes, GST rates, and place-of-supply determination.
• Bank transactions — All receipts and payments are recorded, and bank reconciliation is performed weekly or monthly.
• Journal entries — Accruals, provisions, prepaid expenses, intercompany charges, foreign currency revaluation, and depreciation are recorded through journal entries.

Step 3: Monthly Closing

Each month-end involves:

1. Bank reconciliation completion
2. Foreign currency revaluation of all monetary items at RBI reference rate
3. TDS deposit by the 7th of the following month
4. GST return data preparation (GSTR-1 for outward supplies by the 11th, GSTR-3B for summary return by the 20th)
5. Intercompany reconciliation with the parent company
6. Preparation of the monthly reporting package in the parent company's format
7. Management review of financial statements and variance analysis

Step 4: Quarterly and Half-Yearly Compliance

Each quarter involves:

• Filing TDS returns — Form 24Q (salaries), Form 26Q (non-salary payments to residents), Form 27Q (payments to non-residents)
• Issuing TDS certificates — Form 16 (annual, for salaries, by June 15), Form 16A (quarterly, for non-salary TDS)
• Advance tax computation and payment (if applicable) — due on June 15, September 15, December 15, and March 15

Step 5: Annual Closing and Audit

The financial year ends on March 31. The annual closing process includes:

1. Year-end provisions and accruals (gratuity actuarial valuation, leave encashment, bonus, etc.)
2. Fixed asset verification and depreciation finalization
3. Preparation of financial statements under Ind AS or Indian GAAP in Schedule III format
4. Related party transaction disclosures (critical for foreign-owned companies — arm's-length pricing must be documented)
5. Statutory audit by the appointed Chartered Accountant
6. Filing of AOC-4 (financial statements) and MGT-7 (annual return) with the MCA
7. Transfer pricing audit (Form 3CEB) if international transactions exceed INR 1 crore

Documents Required

For Indian Companies (Generally)

• Certificate of Incorporation, MOA, and AOA
• PAN and TAN of the company
• GST registration certificate
• Bank account opening documents and monthly bank statements
• All vendor invoices, customer invoices, and payment receipts
• Employee appointment letters and payroll details
• Fixed asset purchase invoices and depreciation schedule
• Board meeting minutes and resolutions
• Previous year's audited financial statements (for existing companies)

Additional Documents for Foreign-Owned Subsidiaries

• FIRC (Foreign Inward Remittance Certificate) for all capital infusions from the foreign parent
• FC-GPR filing acknowledgment from the RBI
• Intercompany agreements — management services, IP licensing, cost-sharing, loan agreements
• Parent company's reporting manual and chart of accounts
• Transfer pricing policy documentation
• DTAA-related certificates — Tax Residency Certificate, Form 10F
• Form 15CA/15CB for outward remittances to the parent or other non-residents

Key Regulations & Legal Framework

Companies Act, 2013

• Section 128 — Books of account to be kept at the registered office, on accrual basis and double-entry system. Preservation for 8 financial years.
• Section 129 — Financial statements to comply with accounting standards and Schedule III. Penalty for non-compliance: INR 50,000 to INR 5 lakh fine plus imprisonment up to one year.
• Section 133 — Central Government (through NFRA/NACAS) prescribes accounting standards. Ind AS notified under the Companies (Indian Accounting Standards) Rules, 2015.
• Section 134 — Directors' responsibility statement must confirm that books are maintained as per Section 128, applicable accounting standards are followed, and accounts are prepared on a going-concern basis.
• Section 137 — Filing of financial statements with ROC in Form AOC-4 within 30 days of the AGM.
• Section 143 — Statutory audit requirements. Auditor reports on whether accounts give a true and fair view.

Income Tax Act, 1961

• Section 44AB — Tax audit mandatory if turnover exceeds INR 1 crore (INR 10 crore if 95% of transactions are digital). Tax audit report in Form 3CD filed by September 30.
• Section 92E — Transfer pricing audit in Form 3CEB if international transactions exceed INR 1 crore. Due by November 30.
• Sections 194-195 — TDS provisions covering various categories of payments. Section 195 is specifically for payments to non-residents.
• Section 40(a)(ia) — 100% disallowance of expenses if TDS is not deducted or not deposited.

FEMA Regulations

• FEMA 20(R) — Regulations on foreign investment. FC-GPR must be filed for every share allotment to a foreign investor.
• FEMA 3(R) — Regulations on borrowings. ECB (External Commercial Borrowing) transactions must be reported to the RBI.
• FLA Return — Annual return on foreign liabilities and assets, filed with the RBI by July 15 each year. Data comes directly from the accounting books.

Foreign-Specific Considerations

RBI Reporting Requirements

Foreign-owned Indian subsidiaries must comply with several RBI reporting requirements that are directly derived from accounting records:

• FC-GPR (Foreign Currency — Gross Provisional Return) — Filed when shares are allotted to a foreign investor. The books must record the share capital infusion at the correct exchange rate.
• FLA Return (Foreign Liabilities and Assets) — An annual census of foreign investment, filed by July 15. The data includes total FDI, retained earnings, intercompany loans, and financial performance metrics — all drawn from the accounting records.
• ECB Reporting — If the Indian subsidiary borrows from the foreign parent, each drawdown and repayment must be reported to the RBI through the AD (Authorized Dealer) bank.

DTAA Benefits and Bookkeeping

India has Double Taxation Avoidance Agreements with over 94 countries. When your Indian subsidiary makes payments to the foreign parent — management fees, royalties, interest, dividends — the TDS rate depends on the applicable DTAA. Your accounting system must correctly record: the gross payment amount, the applicable DTAA rate, the TDS deducted, the net payment, and the corresponding Form 15CA/15CB reference. Incorrect application of DTAA rates can result in either over-deduction (tying up the parent's cash) or under-deduction (triggering penalties for the Indian subsidiary).

Repatriation of Profits

Dividends paid by the Indian subsidiary to the foreign parent must be processed through the AD bank with proper documentation. Since April 2020, dividends are taxable in the hands of the recipient (the old Dividend Distribution Tax was abolished). The Indian subsidiary must deduct TDS on dividend payments to non-resident shareholders at 20% (or the lower DTAA rate, typically 10-15%). All of this must be accurately reflected in the accounting records.

Transfer Pricing Compliance

Sections 92A-92F of the Income Tax Act require all international transactions between associated enterprises to be at arm's-length prices. The bookkeeping system must capture: the nature and value of each intercompany transaction, the method used to determine the arm's-length price, comparables and benchmarking data, and the adjustment (if any) made to bring the transaction to arm's length. Companies subject to transfer pricing audit (international transactions exceeding INR 1 crore) must file Form 3CEB by November 30.

Permanent Establishment Risk

If the Indian subsidiary's activities create a Permanent Establishment (PE) for the foreign parent in India (under the applicable tax treaty), the parent may become liable to Indian income tax on profits attributable to the PE. The accounting records of the Indian subsidiary — particularly intercompany agreements, the nature of services provided, and the degree of management control exercised by the parent — are key evidence in PE determination. Clean, well-documented books are your first line of defense against PE assertions by Indian tax authorities.

Benefits & Advantages

• Legal compliance — Proper bookkeeping fulfills the statutory requirements of Section 128 of the Companies Act, the Income Tax Act (for TDS and tax audit), and the GST Act (for return filing).
• Penalty avoidance — Timely TDS deposits prevent the 100% expense disallowance under Section 40(a)(ia). Proper books prevent penalties of up to INR 5 lakh under Section 129.
• Informed decision-making — Monthly financial reports give the foreign parent company real-time visibility into the Indian subsidiary's financial performance, cash position, and profitability.
• Smooth statutory audits — Audit-ready books reduce audit fees (fewer hours needed), minimize audit adjustments, and ensure a clean audit opinion.
• Tax optimization — Accurate tracking of input tax credits, advance tax computations, and DTAA benefits ensures you pay the correct amount of tax — not more.
• Due diligence readiness — If the foreign parent plans to sell the Indian subsidiary, raise additional investment, or bring in a JV partner, clean books are essential for financial due diligence.
• RBI and FEMA compliance — FLA returns, FC-GPR filings, and ECB reporting all depend on accurate accounting data.
• Transfer pricing defense — Well-documented intercompany transactions with proper arm's-length benchmarking provide a strong defense during transfer pricing audits and assessments.

Common Mistakes to Avoid

• Not deducting TDS on intercompany payments — When the Indian subsidiary pays management fees, royalties, or technical service fees to the foreign parent, TDS under Section 195 is mandatory. Missing this results in 100% expense disallowance, plus interest and penalties.
• Using cash-basis accounting — The Companies Act mandates accrual-basis accounting. Companies that record transactions on a cash basis (especially startups in early stages) will face audit qualifications and regulatory issues.
• Ignoring the 8-year book retention requirement — Destroying or losing records within the 8-year preservation period is a compliance violation. Digital backups on Indian servers are essential.
• Not reconciling Indian statutory accounts with parent GAAP monthly — Waiting until year-end to reconcile creates a massive backlog and delays the parent company's consolidation process.
• Failing to file Form 15CA/15CB before making outward remittances — The AD bank will reject the payment if Form 15CA is not filed. Many companies discover this at the last moment and scramble to get the CA certificate.
• Not provisioning for gratuity and leave encashment — These are mandatory employee benefit provisions under Indian law. Foreign companies unfamiliar with gratuity (which has no equivalent in many countries) often miss this provision, leading to material audit adjustments.
• Mixing personal and company accounts — For small subsidiaries where the India director handles petty expenses, it is common for personal and company expenses to get mixed. This creates audit issues and potential tax disallowances.

Timeline & What to Expect

For a newly incorporated subsidiary, the initial setup (chart of accounts, software configuration, accounting policies) takes 5-10 business days. Ongoing monthly bookkeeping runs on a continuous cycle with key deadlines on the 7th (TDS), 11th (GSTR-1), and 20th (GSTR-3B) of each month.

Comparison with Alternatives

In-House Accountant vs. Outsourced Bookkeeping

When to Consider In-House Accounting

In-house accounting makes sense when the Indian subsidiary has more than 50 employees with complex payroll, processes over 500 transactions per month, requires real-time financial reporting (e.g., manufacturing with daily production accounting), or operates in a regulated industry (NBFC, insurance) where the regulator requires in-house finance teams. Even in these cases, many companies maintain an in-house accountant for day-to-day processing and engage an external CA firm for statutory compliance, audit support, and reporting package preparation.