Starting a company of your own may be a dream come true for you. However, most frequently, the persons intending to start a company are unaware of the important terms or compliances failing to comply which can lead them to expend hundreds or thousands in penalties. Apart from penalties, the company and its officers may also be required to face prosecutions and further investigation.
Thus, it worthy to note that a company becomes eligible and subject to various regulatory and procedural annual compliances right from the time of its incorporation. A b registered as per the laws of India is required to comply with the various annual compliances laid down by various corporate laws such as the Companies Act, 2013, Income Tax Act 1961, GST Act 2017, SEBI Act (where the company is a listed entity), etc. and many more.
Since a majority of start-ups are registered as companies, annual compliance of a Company becomes more of a common problem faced by such growing businesses. Frequently, such businesses are incapable to maintain a good track of their annual compliance requirements and consequently plunge under the scrutiny of the Ministry of Corporate Affairs (MCA). Thereby creating numerous hindrances for the businesses in the form of heavy penalties, but also reduces the chance of the start-up’s survival in case of multiple violations.
Nevertheless, to prevent such situations, it becomes a matter of utter importance to be aware of the applicable compliances and understanding them closely.
When it comes about a company under the corporate law in India, there are two primary categories of companies and defined as follows-
A. Public Company –
A Public Limited Company is explained under Section 2(71) of the Companies Act, 2013. Firstly, a Public Limited Company is a company that offers shares to the general public and has limited liability.
Secondly, a Public Limited Company is required to publish its true financial status to its shareholders. It is also provided that a subsidiary company shall also be deemed to be a public company though it continues to function as a private company in its articles.
B. Private Companies –
Section 2(68) of the Companies Act, 2013 provides the definition for private companies. According to which, private companies are those companies whose articles of association expressly mention a restriction for the transferability of shares and prohibit the public at large to subscribe company.
Types of Annual Compliances:
The applicable compliances of a Company are classified as Mandatory Compliances and Event-Based Compliances which must be submitted with the ROC in the prescribed manner, along with the fees and within the limits set by the Ministry of Corporate Affairs.
The Companies Act 1956/2013 prescribes certain compliances that are necessary to be complied and submitted to the MCA portal formed and maintained for the purpose at certain times in a year annually lays down the including a newly registered company unfailingly every year. Whereas some compliances are required to be followed on happening of certain events.
The mandatory annual compliance requirements of a Limited Company include the following-
1. Annual General Meeting & Board Meetings –
The shareholders of a Private Limited Company must meet once every year within six months from the date of closing of the financial year. The Annual General Meeting is required to be held at the company’s registered office or at some other place within the city, town, or village in which the company’s registered office is situated.
The agenda of the AGM can be issues relating to the approval of financial statements, appointment or re-appointment of auditors, declaration of dividends, appointment and remuneration of directors, etc.
Further, every company is required to conduct at least four board meetings every year and the gap between two meetings should not be more than 120 days as per the provisions of section 173 of the Act 2013 and the important resolutions must be filed with the Registrar.
2. Annual Returns & Financial statements-
The Annual Return and Financial Statements of the Private Limited Company must be filed every financial year mandatorily by every registered company irrespective of its turnover or activities. The Annual Return details the information about the company’s shareholders, directors, members, etc. and must be filed within 60 days of holding the Annual General Meeting.
The Financial Statements are different documents relating to the finances of the company and include the Balance Sheet, Statement of Profit and Loss Account, and Director Report. The Financial Statements must be filed within 30 days of holding the Annual General Meeting.
3. Income Tax & GST returns-
A company must file its income tax return every financial year along with other mandatory compliances like Advance Tax, Professional Tax, TDS, etc. Additionally, when the annual turnover of a company is above the limit of INR 1 Cr, the company is mandatorily required to file its Tax Audit every financial year. Further, where a company is involved in the manufacture of goods or provision of services recognized under the GST Act 2017 and crosses the limit of 40lakhs in its annual turnover, it must submit GST monthly, quarterly and annual return.
4. Audit Report-
Every corporation will arrange its Accounts and get the equivalent reviewed by a Chartered Accountant toward the end of the fiscal year compulsorily. It shall be the duty of the auditor to provide an audit report of the evaluated financial statements providing his remarks and later to submit it with the concerned Registrar of the jurisdiction.
5. Maintenance of Registers & Records-
A limited company must maintain all its statutory registers and records in its registered office. Such records must be kept open for inspection at the company’s registered office. The Registers and Records of a company include the Register of shares, Register of Members and Register of Directors, resolutions of the meetings of the Board of Directors, Minutes of the board meetings, and Annual General Meeting.
6. Auditor Appointment-
Every company registered under the Indian Companies Act, 2013 needs to conduct it’s first Annual General Meeting (AGM) and has to appoint an auditor. Such an auditor must be appointed compulsorily by the Board of Directors within 30 days of incorporation, under the provisions of Section 139 of the Act 2013.
Whenever such an auditor is appointed, his appointment must be informed to the Registrar of Companies in prescribed form and manner within a period of 30 days from the date of such appointment.
Similarly, there are certain compliances which are needed to be fulfilled only on the happening of a certain condition. In such an occurrence, the company will be required to file its return in the prescribed form and manner in order to inform the Registrar of Companies (ROC) about such an event.
These event-based compliances of a Limited Company include:
a) Providing Loans to other Companies.
b) Providing Loans to Directors
c) Appointment of KMP.
d) Change in Authorised or Paid-up Capital.
e) Allotment of new shares or transfer of shares
f) Opening or closing of a bank account or change in signatories of Bank account.
g) Appointment or change of the Statutory Auditors.
Apart from this, there may be other compliances in the case of public companies including-
a) Return of Deposits;
b) Appointment of Key Managerial Personnel(KMP);
c) Appointment of CSR Committee;
d) Director’s Disclosure;
e) Appointment of Cost Auditor;
When a Limited Company founds to be not adhering to the applicable annual and event compliances, it will be subject to the following consequences-
i. The Company shall be penalized and may undergo further investigation by the MCA and leading to the dissolution of the company and removal of name from the MCA registry.
ii. It makes it crucial for new as well as existing companies to be aware of compliances applicable to it.
iii. Directors of a company are considered to be the “brain” of the company bearing the responsibility to take action on behalf of the company and to ensure that the company complies with all applicable rules and regulations.
iv. Therefore, where a company commits any default, the directors of the If a Director is disqualified, his/her DIN would become inactive and the person would ineligible to be appointed as a Director of any company for a period of five years from the date of disqualification.
v. Additionally, disqualified Directors would also not be allowed to incorporate a new company for a period of five years.
i. Failure to Submit Annual Report-
Where a company has failed to submit its Annual Return for three continuous financial years, then every person who has been a director or is currently the director of the company concerned could be disqualified under the Companies Act, 2013. where a company fails to file annual returns till September 30 every year, the company may be forced to pay up to 9-12 times of the normal fee for submission;
ii. Failure to Audit Report-
Submit for failure to submit an audit report on time, a company may have to submit an amount equal to either 0.5% of turnover up to the maximum limit of 1.5 lakh.
iii. Failure to maintain necessary registers and records-
Non-maintenance may attract the penalty on the Company & every Officer in Default of not less than Rs. 50,000/- which may extend up to Rs. 3 lacs. Also, a penalty of Rs. 1,000/- per day if the default continues.
iv. Failure to file ITR-
An income taxpayer is liable to pay late ITR filing fees of:
a) Rs 5,000 if the tax return is filed after the deadline but on or before December 31 of the relevant assessment year (in this case December 31, 2020).
b) Rs 10,000 if the tax return is filed after December 31 but before the end the relevant assessment year, i.e., before March 31 (in this case between 1 January 2021 and March 31, 2021).
v. Failure to inform about the appointment of Auditor in ADT-1-
Late filing of Form ADT 1 will attract these penalty fees specified below:
|Delay of filling||Penalty|
|Up to 30 days||2 times of Normal Fees|
|Above 30 days below 60 days||4 times of Normal Fees|
|Above 60 days below 90 days||6 times of Normal Fees|
|Above 90days below 180 days||10 times of Normal Fees|
|Above 180 days||12 times of Normal Fees|
In case the Company fails to fulfill its annual and event compliances, the MCA may initiate legal proceedings against the company resulting in dissolution ultimately. For example, if a company has not filed its Annual Return for the last two financial years continuously, then such companies would be termed as an “inactive company” and its bank account of the company could be frozen.
Additionally, the Registrar has the power to issue a notice to the Company and launch strike-off proceedings for the company from MCA records.
Though there may be companies who practice such offenses with the necessary element of “mens rea”, but there may also be companies who commit mistakes due to lesser knowledge or inadequate guidance. After receipt of multiple requests from such genuine businessmen, the MCA had launched the Companies Fresh Start Scheme 2020, in order to provide a onetime opportunity to regulate the older compliances and later to follow them regularly every year before the 30th of September, failing to do which will bear the same consequences mentioned above.
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