Foreign companies can do business in India by:
Working with a supplier/ agent/ partner
This is basically international trade, by using a simple import-export model. Selling goods to India or procuring goods from India.
Foreign companies can do business with India and within India through the medium of international trade. By entering a partnership with a supplier or an agent in India, foreign companies can gain access to the Indian market. It is advisable to undertake a due diligence of the Indian partner and necessary steps to protect trademark and patents, if applicable, to be on the safer side. However, in the long term, establishing an entity may well be the best solution to expand in the Indian market.
Employer of record model (offshore hiring)
An employer of record takes on personnel on its payroll but the individual works for the foreign company. An employer of record enables companies to outsource talent internationally without having to set up a legal entity in the country where employees are located.
In India, the second option may present foreign companies with risks of creating a permanent establishment (PE) in India. If this comes to the attention of tax authorities, the foreign enterprise will be treated as an assessee in default and would be required to undertake compliances prescribed for a foreign company operating in India. Such compliances include obtaining a Permanent Account Number, undertaking benchmarking study to attribute income in India, and the payment of tax and filing of income tax returns in India. The tax rate is 40 percent on net basis plus a cess of four percent on the tax, together with interest and penalty as prescribed by law.
A permanent establishment (also known as business connection outside India) is a fixed place of business, which may be owned partially or fully by a non-resident businessperson. This definition is enshrined in Article 5 of the Double Taxation Avoidance Agreements that India signs with respective countries. Local branches of multinational firms, factories, and warehouses count as permanent establishments in India. Any profits generated from these establishments are liable to tax under the Income-tax Act, 1961.