Operating Virtual Offices in India: A Guide for Businesses on Rules, Regulations, and Utilization

This Article has been contributed by Harsh Kumra and Sanjana Kumar, Associates with Spice Route Legal's Corporate Practice Group.

In recent times, the boom in the startup industry has given rise to another parallel ecosystem that shares a symbiotic relationship with early-stage startups — this ecosystem being the ecosystem of ‘virtual office spaces’.

What is a “Virtual Office”?
Legal Considerations
How to Obtain a Virtual Office Space in India?

What is a “Virtual Office”?

A “Virtual Office” is a cost-effective solution that offers a non-exclusive and non-dedicated office address to entrepreneurs, for the purposes of managing communication and legalities (such as business registration, goods and service tax ("GST”) registration and maintenance of records). Virtual office allows entrepreneurs to have a professional presence, without having to physically work out of such a premise.

Legal Considerations

Indian law does not prohibit the usage of virtual offices by entrepreneurs and establishments. In the limited cases where the judiciary has gotten involved in assessing the viability and legality of virtual offices, the stance taken by the authority has been in favour of virtual offices. Below are some of the legal considerations involved in setting up and operating virtual offices in India:

A. Requirements Under the Companies Act, 2013 (“Companies Act”):

The Companies Act requires all companies to have a registered office that is capable of receiving and acknowledging all communications and notices that may be addressed to them. The Companies Act does not create a distinction between physical offices and virtual offices. Section 12 of the Companies Act prescribes the conditions that must be fulfilled by a company for the purposes of its registered office, and some of these conditions are set out below:

(1). Companies are required to furnish to the Registrar of Companies (“ROC”) verification of its registered office within a period of 30 (Thirty) days of their incorporation in Form INC 22 (Notice of situation or change of situation of registered office) with supporting documents such as (i) the registered document of the title of the premises of the registered office in the name of the company, (ii) the notarized copy of the lease or rent agreement in the name of the company along with a copy of rent paid receipt, (iii) the authorisation from the owner or authorised occupant of the premises along with proof of ownership or occupancy authorisation, to use the premises by the company as its registered office, and (iv) proof of evidence of any utility service like telephone, gas, electricity, etc. depicting the address of the premises in the name of the owner, which is not older than 2 (Two) months.

(2). Every Company has to:
1. Paint or affix its name and the address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on;

2. have the address of its registered office printed in all its business letters, billheads, letter papers and in all its notices and other official publications; and

3. publish the address of its registered office on the landing/home page of its website.

If the ROC has reasonable cause to believe that a company is not carrying on any business or operations, then the ROC is entitled to cause a physical verification of the registered office of the company, and if any default is found to be made in complying with the requirements, the ROC may initiate action for the removal of the name of the company from the register of companies.

(3). The Companies Act requires companies to maintain certain records and registers at their offices. These requirements would also extend to the companies operating through a virtual office. Some of these requirements include maintenance of copies of all incorporation documents (including the memorandum of association and articles of association), copies of annual returns filed by companies, and statutory registers (such as register of members (Form MGT-1), register of debenture holders or any other security holders (Form MGT 2), register of directors and key managerial personnel, register of charges (Form CHG-7), register of sweat equity shares (Form SH-3), register of employee stock options (Form SH-6) and register of loans, guarantee, security and acquisition made by the company (Form MBP-2)).

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B. Goods and Services Tax Act, 2017 (“GST Act”)

Under the GST Act, all companies that are over the threshold limit as mentioned therein are required to obtain a 15-digit GST identification number and a certificate of registration for each place of business. However, the GST Act does not make a distinction between virtual offices and physical offices. Virtual offices are subject to the same registration requirements under the GST Act as physical offices.

M/s. Spacelance Office Solutions Private Limited, in an application filed with the Kerela Authority For Advance Ruling Goods and Services Tax Department Tax Tower, Thiruvananthapuram ("Authority”), 1 while highlighting that leasing and maintaining full-fledged independent offices in big cities are unaffordable and unfeasible to most of the startup companies due to high rentals and related charges, raised the question as to whether GST registration is allowed for multiple companies from the same address, provided they follow all GST rules related to “principal place of business”.

While answering the question in affirmative, the Authority highlighted that there is no prohibition under the GST law for obtaining GST registration for a shared office space or virtual office, if the landlord permits such sub-leasing as per the agreement. The Authority further recognised that these offices are of greater benefit to travelling freelancers, small businesses, startups and even to the businesses that are operated from remote areas. Additionally, the Authority also stated that companies operating in virtual offices should provide to the relevant authorities, the rental agreement executed between the lessor and lessee, and in the event, there is any sub-lease arrangement, then the rental agreement between lessee and sub-lessee.

In addition to this, the companies should also provide a copy of the “monthly utility bill” in connection with payment towards electricity charges, water charges or other common services availed by the respective suit or desk number occupied by the company operating in the virtual office.

C. Shops and Establishments Framework

Compliance with the shops and establishments framework varies from state to state, given that each state has its separate shops and establishments legislation which contains different applicability thresholds, i.e., the minimum number of employees that should be employed by a company in an establishment for the legislation to be applicable to a company. For instance, while the minimum number of employees in the state of Maharashtra has been designated as 10 (ten) for the Maharashtra Shops and Establishment (Regulation of Employment Condition of Service) Act, 2017 to be applicable to a shop and/or an establishment in the state of Maharashtra, there is no qualifying threshold under the Karnataka Shops and Commercial Establishments Act,

Advance Ruling Number KER/55/2019 dated July 15, 2019

1961, resulting in the act to apply to every shop and establishment in the state of Karnataka.

The definition of “shop” and “establishment” includes any premises where any trade or business is carried on or where services are rendered to customers. The shops and commercial establishments framework applies to every office and shop where commercial activities are carried on. The license for a shop or an establishment is a license that gives an entity a legal identity in terms of carrying on trade or business. The Shops and Establishment legislation does not distinguish physical and virtual offices — accordingly, a view could be taken that even virtual offices would be covered under the ambit of Shops and Establishments legislation.

How to Obtain a Virtual Office Space in India?

There are several service providers in India, such as Awfis, Spring House, IndiQube, The Playce and Cofynd, that provide virtual office spaces to entrepreneurs and startups, and other allied services in relation thereto. The services provided by such service providers include allowing the companies to use the premise as its registered office address, assistance with government-compliant documentation, GST registration, and handling of mail, documents and written communications.

Conclusion

In recent years, to adapt to today’s evolving technological landscape, many businesses have opted for a virtual office solution. One of the main advantages of a virtual office is that they are much more cost-effective than a traditional physical office. This enables entrepreneurs to keep business expenses low as on account of reduced costs of commuting and transportation, office equipment, office maintenance and utilities and other such associated costs of a physical office.

While virtual offices are ideal for new-age entrepreneurs and small-scale companies, this model might not be suitable for medium to large-scale companies, given that such companies would have increased legal compliance burden (in terms of maintaining documents and records, and facilitating statutory inspections); would require a larger workforce; and would have to place reliance on, on account of increased operations, physical meeting rooms and offices.

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FAQs

What is a virtual office?

A virtual office is a cost-effective solution providing a non-exclusive and non-dedicated office address for entrepreneurs.

Are virtual offices legal in India?

Yes, virtual offices are legal in India. The Companies Act, 2013, and Goods and Services Tax Act, 2017, do not distinguish between physical and virtual offices.

Which virtual office service providers are available in India?

Some of the best virtual office service providers in India are:

• Awfis
• Spring House
• IndiQube
• The Playce
• Cofynd