Expanding into India presents European companies with vast opportunities, thanks to its large consumer base, skilled workforce, and pro-business initiatives like Make in India and Digital India. However, India’s complex accounting standards, tax laws, and regulatory framework pose significant challenges that require careful navigation. To ensure a successful and sustainable market entry, businesses must develop a clear understanding of the local financial and compliance landscape to avoid common and costly pitfalls.

This article outlines the key accounting pitfalls that European companies must be aware of while expanding into India and offers strategies to mitigate those risks through better planning, local partnerships, and effective compliance systems.

Key Accounting Pitfalls European Companies Must Watch Out for in India

Lack of Familiarity with Indian Accounting Standards (Ind AS):

European companies, especially those accustomed to IFRS or GAAP in their home jurisdictions, may assume India follows similar standards. However, India has adopted its own version of IFRS, known as Indian Accounting Standards (Ind AS), which includes certain carve-outs and modifications.

How to Avoid It:

• Consult Indian accounting professionals with expertise in Ind AS to ensure compliance with local reporting requirements.
• Understand the phased implementation of Ind AS, which depends on factors like company net worth thresholds and industry type, including mandatory adoption for sectors like banking and insurance.
• Provide targeted Ind AS training for finance teams or engage consultants skilled in both IFRS and Indian standards to bridge knowledge gaps.
• Map differences between Ind AS and IFRS to streamline group-level financial consolidation and reporting.
• Stay updated on ongoing regulatory reforms, including efforts to align auditing practices with international standards while considering Indian-specific requirements.

Overlooking Indian Tax and Statutory Audit Requirements

India’s intricate tax system can lead to costly errors if not properly understood. Incorrect tax filings or misjudging the applicability of the Minimum Alternate Tax (MAT) may result in penalties and audits. Statutory audits are mandatory under the Companies Act, 2013, and additional audits—such as tax, GST, and transfer pricing—may apply based on thresholds. With corporate tax rates nearing 30% for foreign entities, plus surcharges and cess, it’s essential to understand local compliance rules. MAT applies unless exempt under a DTAA and without a permanent establishment—an often-overlooked detail.

How to Avoid It:

• Plan taxes strategically by leveraging applicable Double Taxation Avoidance Agreements (DTAAs) to minimize overall tax liability and avoid double taxation.
• Ensure GST registration if supplying goods or services to customers in India, regardless of having a permanent establishment, as Indian GST laws require registration based on the place of supply.
• Engage qualified tax professionals to handle transfer pricing compliance, including documentation and reporting, since India enforces strict regulations on related-party transactions.

Misclassifying Expenses and Revenue

European companies often classify revenue and expenses based on IFRS or local GAAP, using functional categories and managerial discretion. In contrast, Indian standards (Ind AS), aligned with IFRS but with key deviations, require strict adherence to Schedule III of the Companies Act, emphasizing nature-wise classification and specific disclosures. Misalignment—such as in bundled contracts, lease expenses, or R&D costs—can trigger audit red flags or tax disallowances. Understanding these differences is essential to ensure accurate reporting and compliance in India.

How to Avoid It:

• Use Indian-compliant accounting software or ERP systems aligned with Ind AS, GST, and Schedule III requirements.
• Consult local accounting experts to ensure correct treatment of depreciation, employee benefits, and indirect taxes.
• Accurately classify payroll, reimbursements, and vendor payments per Indian standards to avoid disallowances.
• Train finance teams or engage specialists to bridge differences between IFRS and Ind AS where dual reporting is needed.

Underestimating the Complexity of GST Compliance

The Goods and Services Tax (GST) in India is a multi-layered system with CGST, SGST, IGST components, and place-of-supply rules. Misclassification of services, failure to reconcile GSTR filings, or delayed input tax credit (ITC) claims can result in penalties and working capital blockages.

How to Avoid It:

• Employ dedicated GST consultants or outsourcing firms for monthly compliance.
• Automate GST filings using integrated software and maintain digital trails of invoices.
• Regularly reconcile books with GSTR-2B to avoid mismatches.

Ignoring Transfer Pricing Norms

Transactions between the Indian entity and its European parent or group companies must comply with the Indian Income Tax Act and the associated transfer pricing regulations. These laws require maintaining detailed documentation to demonstrate that all related-party transactions are conducted at arm’s length. Non-compliance can result in significant penalties, tax adjustments, and extended litigation.

How to Avoid It:

• Prepare a Transfer Pricing Study Report annually in accordance with Rule 10D, justifying inter-company pricing through robust benchmarking analysis.
• Monitor updates to Indian TP laws, including safe harbour thresholds, arm’s length principle interpretations, and master/local file requirements under BEPS Action Plan 13.
• Engage experienced transfer pricing consultants or chartered accountants to ensure accurate documentation, defend pricing strategies, and avoid penalties during tax audits.

Delayed or Incorrect TDS (Tax Deducted at Source) Deductions

In India, TDS is mandatory on various payments such as salaries, rent, professional fees, contract payments, interest, and more. Errors in deduction, late payments, or non-filing can lead to disallowance of related expenses under the Income Tax Act, and attract interest, penalties, and notices from tax authorities.

How to Avoid It:

• Classify all payment types accurately and apply the applicable TDS rates as per Indian tax rules.
• Deduct and deposit TDS on time every month and ensure timely filing of quarterly returns using Form 24Q/26Q.
• Use PAN validation and reliable TDS compliance software to avoid mismatches and ensure correct credit to vendors or employees.
• Partner with a professional accounting or tax advisory firm to manage end-to-end TDS compliance, including threshold checks, rate applicability, return filing, and responding to notices.

Failure to Maintain Statutory Registers and Documentation

European companies expanding into India often underestimate the complexity and frequency of local statutory documentation requirements, which are typically more extensive than in their home countries. Indian regulations mandate detailed records—such as board meeting minutes, shareholding changes, fixed assets, and labour law registers. Missing or incomplete records can lead to penalties during ROC inspections, audits, or regulatory reviews.

How to Avoid It:

• Establish strong internal protocols for maintaining statutory records, preferably through secure digital document management systems.
• Conduct regular compliance health checks, including secretarial audits and ROC filings, to stay on top of statutory obligations.
• Avoid reactive or last-minute filings by adopting a calendar-based compliance system.
• Collaborate with a professional accounting and corporate compliance firm that understands both Indian and international governance expectations to ensure seamless coordination of filings, register maintenance, and legal documentation

Currency Conversion and Foreign Exchange Misreporting

European companies may incorrectly account for foreign exchange gains or losses, leading to misstated profits and compliance issues. Additionally, many overlook the need for proper regulatory filings under the Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA) when dealing with inbound capital, outbound remittances, or inter-company transactions.

How to Avoid It:

• Use RBI-notified or authorized dealer exchange rates for accurate forex accounting and revaluation as per Ind AS 21.
• File foreign capital inflows through Form FCGPR and share transfers via Form FCTRS.
• Submit Form 15CA/15CB for outbound remittances to ensure tax compliance.
• Collaborate with banks and consultants experienced in FEMA and RBI regulations for seamless forex reporting.
• Maintain proper reconciliation and documentation of foreign currency transactions for audit readiness.

Final Thoughts

India expansion for European companies comes with immense potential—but also a maze of accounting and compliance risks. From Ind AS to GST and tax audits, the accounting pitfalls for European businesses in India are real and require strategic foresight.

By partnering with local experts and adopting proactive compliance systems, European companies can successfully establish operations, meet regulatory expectations, and focus on growth.

Outsourcing accounting services in India for European companies to professionals like BCL India—specializing in audit, payroll, and compliance—ensures a smooth setup and reduces the burden of local statutory obligations. With the right approach, business incorporation in India can be the first step in a thriving and compliant international venture.