This question comes up in almost every India entry call, usually phrased hopefully: “we’re small, so we probably don’t need an audit yet, right?”

The answer for a foreign-owned Indian subsidiary is short. Yes, you need one. From the first financial year. Regardless of turnover, regardless of whether you have started trading.

Statutory audit has no size threshold

This is the difference that catches foreign parents, and it catches nearly all of them. In the UK, Singapore, Australia and much of Europe, small companies are exempt from audit below specified thresholds. Many founders have run companies in those jurisdictions for years without an auditor.

India does not work that way. Every company incorporated under the Companies Act is required to have its accounts audited by a chartered accountant in practice, and to appoint that auditor shortly after incorporation. A company with no revenue, no employees and one bank account is still audited.

The practical consequence: audit cost belongs in the year-one budget, not the year-three budget. Foreign parents who model India costs on their home-country assumptions get this wrong by a full line item.

The other audits people confuse it with

“Audit” in India covers several distinct obligations, and conflating them causes real confusion:

  • Statutory audit under company law — every company, every year, no threshold
  • Tax audit under the income tax law — triggered by turnover thresholds, with a higher threshold where cash transactions are minimal
  • Transfer pricing certification — required where there are international transactions with related parties, which for a foreign subsidiary usually means from year one
  • GST-related reconciliation and certification — driven by its own turnover thresholds

A small foreign-owned subsidiary very often needs the statutory audit and the transfer pricing report, and not the tax audit. Knowing which applies to you is the difference between a proportionate compliance cost and paying for work you do not need.

Appointing the auditor

The first auditor is appointed by the board within a short window after incorporation, and subsequent appointments are made by the shareholders for a fixed term, with the appointment filed with the registrar. Foreign parents frequently miss the first appointment entirely because the incorporation consultant treated their job as finished at the certificate.

Two constraints worth knowing. The auditor must be independent, which rules out the firm doing your bookkeeping. And rotation requirements apply to certain categories of company, so the auditor you appoint is not necessarily the auditor you keep indefinitely.

What the audit actually looks at in a small subsidiary

The audit of a young subsidiary is not primarily about revenue recognition. It concentrates on the areas where these entities genuinely go wrong:

Related-party transactions. How the parent funds the entity, what it charges down, what the subsidiary charges up, and whether all of it is identified, approved and disclosed. This is where the auditor’s findings and the transfer pricing position have to agree with each other.

Share capital and foreign investment. Whether inbound funds were received, allotted and reported correctly, and whether the exchange-control filings were made in time. Unreported inflows surface here.

Statutory dues. Whether TDS, GST and payroll obligations were deducted, deposited and filed on time. Delays are reportable, and they become part of the permanent record of the company.

The minute book. Whether the board actually met and actually approved what it is recorded as approving.

Why it matters more than it looks

It is tempting to treat this as a compliance tax on being small. Two things change that view.

First, the audited accounts are what every future counterparty reads — a bank, an acquirer, an investor, a tax officer. A clean, timely set of audited accounts from year one is an asset. A gap or a qualification in an early year is a question you answer for the rest of the company’s life.

Second, the audit is the only annual moment when someone independent looks at whether the India entity is operating the way the group thinks it is. For a parent running a subsidiary at a distance, that is worth more than the compliance value.

If you are setting up in India or have a subsidiary whose first audit is overdue, AeTx handles statutory audit alongside the transfer pricing and exchange-control work that goes with a foreign-owned entity, rather than as a standalone exercise.