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Basic Compliance Requirements for startups

Nithya Dilip 
on 08 December 2017

LinkedIn


There are many first time entrepreneurs on the rise in India. Many a times, they are confused about the compliance requirements they need to follow under the various Indian laws. This is an attempt to make it a little easier for them to understand the various compliance requirements under different statutes.

Incorporation/Registration

Partnership Firm- Though registration is not mandatory, it is advisable. Partnership deed is created on a judicial stamp paper of Rs. 2,000/- and has to be signed by all the partners. It contains rights and duties of the firm and the partners. Partners need to apply for PAN for the firm. Generally, forming partnership firms are much less complex than forming a Company.

Private Limited Company: Name availability, applying for PAN, ROC Registration, Drafting Memorandum and Articles of Association, Filing Particulars of Directors and MD in Form 32 are some of the crucial requirements. The compliance requirements are complex compared to a partnership firm. Limited liability Partnerships can be another option which is very similar to Private Limited Companies but have lesser compliance requirements.

GST Registration and Compliances

  1. Earlier traders had to register under VAT, Manufacturers under excise and Service providers under Service Tax. Now there is only a single GST registration for all these persons and input credit can be availed for all the transactions. Earlier a VAT dealer could not avail ST credit and vice versa. Similarly a VAT dealer or a Service provider could not avail Excise Duty credit.
  2. Under GST, we are also eligible to avail Input Tax credit on Plant and Machinery and other assets except Motor vehicles.
  3. If you are doing business with B2B costumers, it is advisable to get GST registration done, even if the Turnover is less than 20 Lakhs. This will enable the corporate customers to claim input credit on purchase of your goods/services. However if your turnover is less than 20 lakhs, you have an option not to register under GST
  4. Find out the HSN codes/ SAC codes for your products/Services and the rate of tax applicable to them.
  5. If you have multiple business places, in different states, it is mandatory to take separate registration for each place of business. Stock transfer to different branches will be a taxable supply under GST.
  6. In order to claim input GST credit, make sure that you have a proper GST invoice from the supplier with GST Number and Rate of tax clearly mentioned therein. Under GST law, you are eligible to claim credit only if the supplier files the returns and pays his GST liability. Make sure that he files with details of his sales with your GST number in his GSTR1. Practically, it would be advisable to make the payment to supplier only after you receive the input GST credit.
  7. If you have both exempt and taxable turnover, maintain proper bifurcation for each as input credit for exempt sales is not allowed.
  8. For Inter-state supply charge IGST and for Intra-state charge, SGST and CGST. The tax rate, amount and GST number is to be shown clearly on the invoice. Take the GST number if the customer is registered so that you can pass on the GST credit.
  9. Supply from a Principal to Agent or vice versa is a Taxable supply under GST
  10. There are some blocked credits for Rent-a-cab, Purchase of motor vehicles, payments to clubs, Insurance etc. Do not assume that you can claim credit on all inputs where GST number is mentioned on the invoice.
  11. Normally, GST liability needs to be paid before 20th of the succeeding month.
  12. Accounting Records to maintain for GST ACT-Inward and Outward Register, Stock Register, Account of Advances, Tax Details Register, Vendors and Customers Details Register, Details of place of storage of goods, Production Details Register.

TAN, TDS and Income Tax

TAN is a 10 digit alphanumeric number. Every Assessee who is liable to deduct TDS is required to apply for TAN. All Companies and Partnership firms are liable to deduct TDS and remit it to IT department. Individuals are liable to deduct TDS only if they have to do Tax Audit.

Most Common TDS deductions are:


Nature

Section

Limit

Time of deduction

Individual

Others

No PAN

Contract

194C

30,000

First payment

1%

2%

20%

Rent

194I

1,80,000

Each payment

10%

10%

20%

Professional Services

194J

30,000

First payment

10%

10%

20%


Please note that there are many more sections for various payments. I have only specified some of the common items. TDS shall be deducted on payments such as salaries, interest, professional fee, rent, brokerage and commission, dividends.

Salary is one of the main payments where Tax needs to be deducted. Here we need to compute tax for each employee and deduct on a monthly basis.

Steps to follow:

  1. Apply for TAN
  2. Check the nature of each payment that you are making. See if they fall under the TDS purview.
  3. Deduct the specified % of TDS and make the payment to the vendor.
  4. While doing quarterly filing of TDS returns, mention the correct PAN of the vendor.
  5. In case the vendor doesn't have a PAN, deduct at the flat rate of 20%.
  6. Make TDS payments to the IT department before 7th of next month for all months except for March, and within 30th April for the month of March.
  7. Interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.
  8. Further, as per section 201, the person who is required to pay TDS and has failed to so, shall be deemed to be in default and shall be liable to pay penalty of up to 100 percent of the amount of TDS not paid. In addition, rigorous imprisonment up to 7 years can be imposed on willful defaulters
  9. If the company remains non-compliant regarding TDS provisions, the TDS amount and interest thereon shall be charged on the assets of the company or upon the principal officer who is required to deduct and pay TDS;
  10. Further, the expenses on which TDS was required to be deducted and paid and has either not been deducted or paid, such expense shall be disallowed in computation of total income and taxes thereon.
  11. Advance Income tax to be computed and paid periodically on or before the due dates prescribed.

Due Dates for Advance Tax are as follows:


Due Date

Instalment Payable

On or before 15th Jun

Not less than 15% of advance tax.

On or before 15th Sep

Not less than 45% of advance tax as reduced by the amount paid in the earlier instalment.

On or before 15th Dec

Not less than 75% of advance tax as reduced by the amount paid in the earlier instalments.

On or before 15th Mar

The whole amount (100%) of advance tax as reduced by the amount paid in the earlier
instalments.


  1. Annual filing of Income Tax returns on or before due dates
  2. Filing of Tax Audit Report. Tax Audit is applicable when the Turnover exceeds the specified limit as per Section 44AB of the Income Tax Act.

Cash Payments and others

To the maximum extent possible, it is advisable to avoid cash payments. Any cash payment in excess of INR 10,000 will be disallowed U/s 40A(3).

If you are making any foreign payments make sure that all compliances are met. It may require 15CA/15 CB etc. if when paid through credit cards. TDS will also be attracted and reverse GST also may apply in most of the cases.

PF, ESI ACT

1) PF Act applies to every establishment where 20 or more persons are employed. If the salary of the employee is less than 15000 p.m., PF is mandatory. Approximately 12% is deducted as contribution from the employee's salary and the same percentage is contributed by the employer to the fund.

2) ESI Act applies to factories employing 10 or more persons. Wage ceiling is INR 21000 p.m in the case of ESI. Currently, the employee's contribution rate is 1.75% of the wages and that of employer's is 4.75% of the wages paid/payable in respect of the employees in every wage period.

Shops ACT

The Shop and Establishment Act in India is promulgated by the state and may slightly differ from state to state. However, as per the Act, all shops and commercial establishments operating within each state are covered by the respective Shop & Establishments Act. Shops are defined as premises where goods are sold either by retail or wholesale or where services are rendered to customers, and includes an office, a store-room, godown, warehouse or workhouse or work place. Establishments are defined as shop, a commercial establishment, residential hotel, restaurant, eating-house, theatre or other places of public amusement or entertainment. Further, establishments as defined by the act may also include such other establishments as defined by the Government by notification in the Official Gazette. However, factories are not covered by the shops & establishments act and are regulated by the Factories Act, 1948.

Professional Tax

Professional Tax is a tax levied on professions and trades in India. It is a state-level tax and has to be compulsorily paid by every member of staff employed in private companies. The owner of a business is responsible to deduct professional tax from the salaries of his employees and pay the amount so collected to the appropriate government department.

Professional tax is usually a slab-amount based on the gross income of the professional. It is deducted from his income every month. Some of the state governments that have levied professional tax are Karnataka, West Bengal, Andhra Pradesh, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura and Madhya Pradesh. In case of salaried employees and wage earners, Employer is liable to deduct professional tax with the State Government. In case of other class of Individuals, this tax is liable to be paid by the person himself.

Employee related compliances

1) PAN, Aadhar etc. to be collected from employees.

2) Advisable to open bank account for salary transfer or use an existing account. Cash payments to be avoided

3) Collect Investment Declaration in the beginning of every financial year and Investment proof by Feb of each FY. This is for proper computation of TDS and remittance.

4) Gratuity needs to be paid to the Employee leaves after completion of 5 years of continuous service.

Specific Compliances w.r.t Private Limited Companies

  1. At least 4 Board Meetings to be held in a year. Minutes to be maintained
  2. AGM needs to be held every year. Approval of financial statements, appointment of auditors, declaration of dividends etc. is the main agenda.
  3. The Directors are required to inform the Company about their directorship in other companies every year.
  4. There are many annual returns to be filed with the ROC. Eg: MG-7, AOC-4,MBP-1,DIR-8, Director's Report

Each business should also check the compliance requirement under specific Acts such as Factories Act, Environment and Protection Act, Money Laundering Act etc.

Audits

Company Audit

The provisions for company audits are contained in the Companies Act 1956 and Companies Act 2013 as applicable. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors must first appoint an auditor at the outset. Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the conclusion of the next AGM. After the completion of the term, the auditor must be changed.

Tax Audits

Tax audits are required under Section 44AB of India's Income Tax Act 1961. This section mandates that those whose business turnover exceeds INR 1 crore and those working in a profession with gross receipts exceeding INR 50 Lakhs, must have their accounts audited by an independent chartered accountant. The audit report is made using Form 3CD along with either Form 3CA or Form 3CB. The provision of tax audits are applicable to everyone, be it an individual, a partnership firm, a company, or any other entity. The tax audit report is to be completed by September 30 after the end of the previous FY.


Category of Taxpayer

FY 2016-17 Onwards

Business (Not opting Presumptive Income Scheme)

1 crores

Professionals(Not opting Presumptive Income Scheme)

50 Lakhs

Business opting Presumptive Income scheme u/s 44AD

2 crores

Professionals opting Presumptive Income scheme u/s 44ADA

50 lakhs


Accounting, Reporting and Maintenance of Records

It is advisable to maintain monthly accounts in any Accounting software so that all the required statutory and management reports can be generated. Monthly Profit and Loss Account, Balance Sheets, Sales and Purchase Reports, Accounts Receivables/Payables Reports are not only required for statutory compliances but for the management too.

Proper Financial Accounting and Reporting can help the start-ups to understand the costs involved in each business decision and can help in making critical decisions. It is advisable to maintain profitability customer wise/Project wise and also for each vertical separately. These features are available in most of the Accounting software available currently.

According to section36(1) of CGST Act every registered person is required to keep and maintain books of accounts and other records 72 months from the due date of furnishing the annual return for the year pertaining to such accounts and records.

Under the Income Tax Act, Rule 6F(5) provides that Assessees are required to preserve the specified books of account for a period of 6 years from the end of the relevant assessment year, i.e., for a total period of 8 previous years.

As per Sec 128 of the Companies Act 2013, a company is required to maintain its books of account and vouchers for a period of 8 years immediately preceding the current year.

Maintaining physical as well as scanned documentation will help in Audits and for tax purposes under GST and Income Tax Acts.

Conclusion

Basic Compliances and Accounting for Start ups

There are many first time entrepreneurs on the rise in India. Many a times, they are confused about the compliance requirements they need to follow under the various Indian laws. This is an attempt to make it a little easier for them to understand the various compliance requirements under different statutes.

Incorporation/Registration

Partnership Firm- Though registration is not mandatory, it is advisable. Partnership deed is created on a judicial stamp paper of Rs. 2,000/- and has to be signed by all the partners. It contains rights and duties of the firm and the partners. Partners need to apply for PAN for the firm. Generally, forming partnership firms are much less complex than forming a Company.

Private Limited Company: Name availability, applying for PAN, ROC Registration, Drafting Memorandum and Articles of Association, Filing Particulars of Directors and MD in Form 32 are some of the crucial requirements. The compliance requirements are complex compared to a partnership firm. Limited liability Partnerships can be another option which is very similar to Private Limited Companies but have lesser compliance requirements.

GST Registration and Compliances

  1. Earlier traders had to register under VAT, Manufacturers under excise and Service providers under Service Tax. Now there is only a single GST registration for all these persons and input credit can be availed for all the transactions. Earlier a VAT dealer could not avail ST credit and vice versa. Similarly a VAT dealer or a Service provider could not avail Excise Duty credit.
  2. Under GST, we are also eligible to avail Input Tax credit on Plant and Machinery and other assets except Motor vehicles.
  3. If you are doing business with B2B costumers, it is advisable to get GST registration done, even if the Turnover is less than 20 Lakhs. This will enable the corporate customers to claim input credit on purchase of your goods/services. However if your turnover is less than 20 lakhs, you have an option not to register under GST
  4. Find out the HSN codes/ SAC codes for your products/Services and the rate of tax applicable to them.
  5. If you have multiple business places, in different states, it is mandatory to take separate registration for each place of business. Stock transfer to different branches will be a taxable supply under GST.
  6. In order to claim input GST credit, make sure that you have a proper GST invoice from the supplier with GST Number and Rate of tax clearly mentioned therein. Under GST law, you are eligible to claim credit only if the supplier files the returns and pays his GST liability. Make sure that he files with details of his sales with your GST number in his GSTR1. Practically, it would be advisable to make the payment to supplier only after you receive the input GST credit.
  7. If you have both exempt and taxable turnover, maintain proper bifurcation for each as input credit for exempt sales is not allowed.
  8. For Inter-state supply charge IGST and for Intra-state charge, SGST and CGST. The tax rate, amount and GST number is to be shown clearly on the invoice. Take the GST number if the customer is registered so that you can pass on the GST credit.
  9. Supply from a Principal to Agent or vice versa is a Taxable supply under GST
  10. There are some blocked credits for Rent-a-cab, Purchase of motor vehicles, payments to clubs, Insurance etc. Do not assume that you can claim credit on all inputs where GST number is mentioned on the invoice.
  11. Normally, GST liability needs to be paid before 20th of the succeeding month.
  12. Accounting Records to maintain for GST ACT-Inward and Outward Register, Stock Register, Account of Advances, Tax Details Register, Vendors and Customers Details Register, Details of place of storage of goods, Production Details Register.

TAN, TDS and Income Tax

TAN is a 10 digit alphanumeric number. Every Assessee who is liable to deduct TDS is required to apply for TAN. All Companies and Partnership firms are liable to deduct TDS and remit it to IT department. Individuals are liable to deduct TDS only if they have to do Tax Audit.

Most Common TDS deductions are:


Nature

Section

Limit

Time of deduction

Individual

Others

No PAN

Contract

194C

30,000

First payment

1%

2%

20%

Rent

194I

1,80,000

Each payment

10%

10%

20%

Professional Services

194J

30,000

First payment

10%

10%

20%


Please note that there are many more sections for various payments. I have only specified some of the common items. TDS shall be deducted on payments such as salaries, interest, professional fee, rent, brokerage and commission, dividends.

Salary is one of the main payments where Tax needs to be deducted. Here we need to compute tax for each employee and deduct on a monthly basis.

Steps to follow:

  1. Apply for TAN
  2. Check the nature of each payment that you are making. See if they fall under the TDS purview.
  3. Deduct the specified % of TDS and make the payment to the vendor.
  4. While doing quarterly filing of TDS returns, mention the correct PAN of the vendor.
  5. In case the vendor doesn't have a PAN, deduct at the flat rate of 20%.
  6. Make TDS payments to the IT department before 7th of next month for all months except for March, and within 30th April for the month of March.
  7. Interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.
  8. Further, as per section 201, the person who is required to pay TDS and has failed to so, shall be deemed to be in default and shall be liable to pay penalty of up to 100 percent of the amount of TDS not paid. In addition, rigorous imprisonment up to 7 years can be imposed on willful defaulters
  9. If the company remains non-compliant regarding TDS provisions, the TDS amount and interest thereon shall be charged on the assets of the company or upon the principal officer who is required to deduct and pay TDS;
  10. Further, the expenses on which TDS was required to be deducted and paid and has either not been deducted or paid, such expense shall be disallowed in computation of total income and taxes thereon.
  11. Advance Income tax to be computed and paid periodically on or before the due dates prescribed.

Due Dates for Advance Tax are as follows:


Due Date

Instalment Payable

On or before 15th Jun

Not less than 15% of advance tax.

On or before 15th Sep

Not less than 45% of advance tax as reduced by the amount paid in the earlier instalment.

On or before 15th Dec

Not less than 75% of advance tax as reduced by the amount paid in the earlier instalments.

On or before 15th Mar

The whole amount (100%) of advance tax as reduced by the amount paid in the earlier
instalments.


  1. Annual filing of Income Tax returns on or before due dates
  2. Filing of Tax Audit Report. Tax Audit is applicable when the Turnover exceeds the specified limit as per Section 44AB of the Income Tax Act.

Cash Payments and others

To the maximum extent possible, it is advisable to avoid cash payments. Any cash payment in excess of INR 10,000 will be disallowed U/s 40A(3).

If you are making any foreign payments make sure that all compliances are met. It may require 15CA/15 CB etc. if when paid through credit cards. TDS will also be attracted and reverse GST also may apply in most of the cases.

PF, ESI ACT

1) PF Act applies to every establishment where 20 or more persons are employed. If the salary of the employee is less than 15000 p.m., PF is mandatory. Approximately 12% is deducted as contribution from the employee's salary and the same percentage is contributed by the employer to the fund.

2) ESI Act applies to factories employing 10 or more persons. Wage ceiling is INR 21000 p.m in the case of ESI. Currently, the employee's contribution rate is 1.75% of the wages and that of employer's is 4.75% of the wages paid/payable in respect of the employees in every wage period.

Shops ACT

The Shop and Establishment Act in India is promulgated by the state and may slightly differ from state to state. However, as per the Act, all shops and commercial establishments operating within each state are covered by the respective Shop & Establishments Act. Shops are defined as premises where goods are sold either by retail or wholesale or where services are rendered to customers, and includes an office, a store-room, godown, warehouse or workhouse or work place. Establishments are defined as shop, a commercial establishment, residential hotel, restaurant, eating-house, theatre or other places of public amusement or entertainment. Further, establishments as defined by the act may also include such other establishments as defined by the Government by notification in the Official Gazette. However, factories are not covered by the shops & establishments act and are regulated by the Factories Act, 1948.

Professional Tax

Professional Tax is a tax levied on professions and trades in India. It is a state-level tax and has to be compulsorily paid by every member of staff employed in private companies. The owner of a business is responsible to deduct professional tax from the salaries of his employees and pay the amount so collected to the appropriate government department.

Professional tax is usually a slab-amount based on the gross income of the professional. It is deducted from his income every month. Some of the state governments that have levied professional tax are Karnataka, West Bengal, Andhra Pradesh, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura and Madhya Pradesh. In case of salaried employees and wage earners, Employer is liable to deduct professional tax with the State Government. In case of other class of Individuals, this tax is liable to be paid by the person himself.

Employee related compliances

1) PAN, Aadhar etc. to be collected from employees.

2) Advisable to open bank account for salary transfer or use an existing account. Cash payments to be avoided

3) Collect Investment Declaration in the beginning of every financial year and Investment proof by Feb of each FY. This is for proper computation of TDS and remittance.

4) Gratuity needs to be paid to the Employee leaves after completion of 5 years of continuous service.

Specific Compliances w.r.t Private Limited Companies

  1. At least 4 Board Meetings to be held in a year. Minutes to be maintained
  2. AGM needs to be held every year. Approval of financial statements, appointment of auditors, declaration of dividends etc. is the main agenda.
  3. The Directors are required to inform the Company about their directorship in other companies every year.
  4. There are many annual returns to be filed with the ROC. Eg: MG-7, AOC-4,MBP-1,DIR-8, Director's Report

Each business should also check the compliance requirement under specific Acts such as Factories Act, Environment and Protection Act, Money Laundering Act etc.

Audits

Company Audit

The provisions for company audits are contained in the Companies Act 1956 and Companies Act 2013 as applicable. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors must first appoint an auditor at the outset. Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the conclusion of the next AGM. After the completion of the term, the auditor must be changed.

Tax Audits

Tax audits are required under Section 44AB of India's Income Tax Act 1961. This section mandates that those whose business turnover exceeds INR 1 crore and those working in a profession with gross receipts exceeding INR 50 Lakhs, must have their accounts audited by an independent chartered accountant. The audit report is made using Form 3CD along with either Form 3CA or Form 3CB. The provision of tax audits are applicable to everyone, be it an individual, a partnership firm, a company, or any other entity. The tax audit report is to be completed by September 30 after the end of the previous FY.


Category of Taxpayer

FY 2016-17 Onwards

Business (Not opting Presumptive Income Scheme)

1 crores

Professionals(Not opting Presumptive Income Scheme)

50 Lakhs

Business opting Presumptive Income scheme u/s 44AD

2 crores

Professionals opting Presumptive Income scheme u/s 44ADA

50 lakhs


Accounting, Reporting and Maintenance of Records

It is advisable to maintain monthly accounts in any Accounting software so that all the required statutory and management reports can be generated. Monthly Profit and Loss Account, Balance Sheets, Sales and Purchase Reports, Accounts Receivables/Payables Reports are not only required for statutory compliances but for the management too.

Proper Financial Accounting and Reporting can help the start-ups to understand the costs involved in each business decision and can help in making critical decisions. It is advisable to maintain profitability customer wise/Project wise and also for each vertical separately. These features are available in most of the Accounting software available currently.

According to section 36(1) of CGST Act every registered person is required to keep and maintain books of accounts and other records 72 months from the due date of furnishing the annual return for the year pertaining to such accounts and records.

Under the Income Tax Act, Rule 6F(5) provides that Assessees are required to preserve the specified books of account for a period of 6 years from the end of the relevant assessment year, i.e., for a total period of 8 previous years.

As per Sec 128 of the Companies Act 2013, a company is required to maintain its books of account and vouchers for a period of 8 years immediately preceding the current year.

Maintaining physical as well as scanned documentation will help in Audits and for tax purposes under GST and Income Tax Acts.

Conclusion

The requirements as per Income Tax Act, GST Act, Companies Act, Factories Act, ESI, PF, Professional Tax etc. are to be complied with. There might be other specific Acts which might be applicable to certain industries.


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