Synopsis
This blog explains essential tax compliance requirements for startups in India. It highlights key GST and ITR obligations, filing procedures, penalties, and benefits. A must-read for new entrepreneurs aiming to meet legal standards and avoid fines.
Introduction
India's start-up ecosystem is expanding rapidly, which requires entrepreneurs to understand their tax liability from the beginning. Start-ups should follow both direct taxes, such as tax return (ITR), and indirect taxes, such as goods and services tax (GST). While GST applies to the delivery of goods and services, ITR reflects revenues and profits for a given financial year. Ignoring tax obligations can lead to loss of trust and reliability. This blog outlines the key compliance requirements for GST and ITR that every Indian startup must follow to stay compliant and build a legally sound business.
Understanding Income Tax Return (ITR) for Startups
Submission of Income Tax Return(ITR) is an important obligation that ensures economic transparency and regulatory compliance for a start-up. This not only helps to avoid legal punishment, but also creates reliability with investors, banks and stakeholders.
An income tax return (ITR) is a statement submitted during income tax return filing, where a startup reports its income, expenses, and tax obligations to the Income Tax Department for the financial year. Depending on the type of business structure, different ITRs are used. ITR-3 is used as a structured ownership of start-ups, used on ITR-5 LLP and participation, while ITR-6 is for private limited companies that do not require exemption under Section 11.
Key Income Tax Compliance for Startups
To remain compliant and avoid penalties, startups must adhere to several income tax responsibilities throughout the financial year.
● Computation of Total Income: Start-ups should calculate the total income by incorporating income from all sources - implementing business, capital gains, interest rates, etc. and relevant cuts.
● Applicable Tax Rates: Private limited companies are charged 25% (or 22% by Section 115baa without exemption), and LLP is taxed at over 30% applied overload and cessation.
● Advance Tax Payment: If the estimated tax liability is more than ₹10,000 in a year, the start-up will have to pay advance tax in quarterly instalments.
● TDS (Tax Deducted at Source) & TCS (Tax Collected at Source): Start-ups should cut TDS on salaries, rent, and contractor payments, and TDS returns must be submitted quarterly. TCS may apply in cases of specified sales transactions.
● Tax Audit: Start-ups with a turnover is subject to more than ₹1 crore (or ₹10 crore if digital transactions make up more than 95%) are subject to compulsory tax audit by Section 44AB.
● Dedications and Incentives for Eligible Startups (Section 80IAC): Recognised startups may require 100% tax exemption for profits for 3 years in a row for 10-year blocks under section 80IAC under DPIIT Qualification and incorporation date.
Due Dates for ITR Filing
1. 31st July for non-audited entities
2. 31st October for audited firms or companies
3. 30th November, if transfer pricing reports are applicable
● Penalties for Non-Compliance in Income Tax: Failure to conduct a tax audit as required under the Income Tax Act, 1961, may result in a penalty of ₹1.5 lakh or 0.5% of your total turnover, whichever is lower.
Understanding Goods and Services Tax (GST) for Startups
For any startup engaged in the supply of goods or services, understanding GST is essential to remain compliant and financially disciplined. It affects prices, invoicing and credit flow regions for a growing business.
The goods and service tax (GST) is India's integrated indirect tax system that replaces various fees, such as value added tax, fee and service fee. This eliminates the tax collection and eliminates the cascading effect of several taxes by presenting a single, nationwide disposition. GST is classified in CGST, SGST/published and GST depending on the type of transaction. For online GST registration, startups must apply through the GST portal by submitting necessary documents such as PAN, address proof, bank details, and a digital signature. Once verified, they receive a GSTIN (GST Identification Number), enabling tax collection and credit eligibility.
Types of GST Registration Relevant to Startups
- Regular taxpayer: For more businesses than the threshold limit.
- Rachna Yojana: For the qualified start-up with turnover up to 1.5 crore (₹75 lakh in some states), reduced tax rates, but no incoming tax credit.
- Voluntary registration: For start-ups under the threshold to require ITC or promote reliability.
Key GST Compliances for Startups
Start-ups should follow regular GST compliance, including timely registration, submission of returns and maintenance of records.
GST Invoicing Rules: Tax calls should be issued for each taxable supply, including GSTIN, HSN/SAC code and tax break. The Challan should follow the prescribed format and count sequentially.
Maintaining Records: Companies should maintain accounting books, GST returns, purchase and sales registers and ITC requirements for a minimum of six years from the final submission date.
Input Tax Credit (ITC): Start-up may require ITC on the purchase used for commercial purposes. However, ITC is not available under the composition scheme, and it requires proper documentation and timely submission of returns.
GST Return Filing
Startups need to file returns like:
- GSTR-1 (outward supplies),
- GSTR-3B (summary return), and
- GSTR-9 (annual return), based on turnover and scheme applicability.
GST Payment: GST is paid monthly while filing GSTR-3 B. After adjusting ITC, businesses registered through online GST registration must collect and deposit the tax amount received from customers.
Penalties for Non-Compliance in GST: Non-adherence can result in fines of up to 10% of the tax due or ₹10,000, whichever is higher, along with interest and legal consequences
|
Note: You must get online GST registration if:
|
General Compliance Best Practices for Indian Startups
In addition to compulsory archiving, start-ups should start using strong compliance habits to maintain development. These best practices help reduce legal risks and economic deviations.
Maintain Accurate Books of Accounts: The correct order is required for GST and ITR compliance. Start-ups should keep daily items, including income, expenses, properties and obligations in the formats prescribed in accordance with the law. Errors or lack of entries can prevent punishment and audit, or money.
Regular Reconciliation: Start-ups must often cover GST returns with accounting registers and bank statements to avoid discrepancies. It helps to identify incoming tax credit problems or income intervals, which is important before submitting a return.
Leveraging Technology: By using cloud-based accounting software or GST platforms, you ensure real-time updates, automated calculations and notification alerts. Technology helps avoid human errors and reduces the dependence on manual intervention during return or revision.
Staying Updated: Tax laws, GST rules and submission of deadlines are often changed. Start-ups should follow the government portals such as CBIC (Central Board of Indirect Taxes and Customs Service) or Income Tax Department, or subscribe to updates from reliable sources to remain compliant.
Seeking Professional Help: Engaging a CA or tax lawyer service from the beginning can help startups stay compliant, especially when handling TDS, tax audits, or startup-specific incentives under Section 80IAC. Professionals ensure that no qualified benefits are missed, and non-compliance helps to avoid losses.
Conclusion
In conclusion, for start-ups in India, timely compliance with GST and income tax requirements is not just a regulatory formality - this is a strategic requirement. GST registration can save both money and legal problems for understanding the threshold, invoice rules, ITC requirements and ITR obligations such as TDS, tax audit and benefits of section 80IAC. A start-up that maintains accurate records, remains updated with tax changes and seeks professional guidance, provides better on a scale and investors form confidence. By entering strong compliance habits, entrepreneurs create a flexible basis for permanent development in India's competitive and developed commercial scenario.
CAclubindia
