Start-ups- Things to consider from various Tax & Regulatory perspective

Today, many innovative ideas have evolved around the nation and people have come up with start-up entities to commercialise on their ideas. Start-ups today are more in news considering their potential and the out of the box thinking. But what looks exciting and attractive, is not necessarily simple and easy. Entrepreneurs many times dwell into the idea of start-ups and tend to ignore various perspectives from Indian tax & regulatory perspective. India is known to have one of most complicated tax and regulatory systems. We have therefore tried to list down various aspects to consider by a Start-up Company. This would differ considering the nature of business (manufacture, trading, service, etc.) but we have tried to cover this in general for having an overall idea of regulatory systems in India. Further, we have brought out this note on a broad level:

1. Formation of Company

Most start-up entrepreneurs prefer to have a Private Company for its own benefits. However, they can also prefer to have a Limited Liability Partnership (LLP) or a Limited Company, based on their requirements. Come what may, they will have to consider the requirements/ process of Registrar of Companies (ROC) in order start with which would involve the process right from selecting the unique name for the entity till the submission of various forms with ROC. A process done right, usually takes 10 to 14 days (differs based on the time taken by ROC to process the Forms) for a company/ LLP formation after all the forms are submitted with ROC.

2. Opening of bank account & Book keeping

This is the first step any company would do after its registration process is completed with ROC. The bank documents are considered one of the address proofs for further registrations required by the Company/ LLP. Further, the entity should maintain the books of account.

3. Issue of Shares

Considering that the start-up companies are embedded with the ideas, it is required that the Company shares are valued before doing private placements. This is required under various laws viz. FEMA, Income-tax and Companies Act. These regulations state various methods for the purpose of valuing the shares of the Company below which the Company should not issue the shares. Shares can be valued by a Chartered Accountant, Merchant Banker or a Registered Valuer as per the specific requirement of the regulation 

4. Taxation & Other registrations

a. Shop & Establishment Registration

This registration will be required if it satisfies the conditions mentioned in the Act of the relevant state

 b. Income-tax Act, 1961

 i. Permanent Account Number (PAN): This will be received along with the Incorporation Certificate

ii. Tax Deduction & Collection Account Number (TAN): This will be received along with the Incorporation Certificate

iii. There are also various benefits provided to start-ups from Income-tax perspective, for which certain compliances are requried

c. Goods & Service tax

This registration will be required if it crosses the threshold of 20 lacs in a particular fiscal year. However, it is usually recommended to have this registration number if the said threshold is estimated to be achieved considering that the input tax credit can then be claimed by the entity.

d. Other registrations

There are other registrations also which are required based on the eligibility criteria of the business or entity or based on the number of employees employed. The various statutory acts under which such registrations may be required have been stated as under:

1. Employee’s Provident Fund & Miscellaneous Provisions Act, 1952
2. Employee’s State Insurance Act, 1948
3. Profession tax (state concept)
4. Labour Welfare Fund (state concept)
5. The Central Excise Act, 1944 (wherever applicable)
   

5. Compliance requirements

 a. Income-tax Compliances

 i. Monthly payment of taxes deducted at source (TDS) before 7^th of subsequent month

ii. Quarterly filing of eTDS returns

iii. Quarterly reviewing the profits of the entity for payment of Advance tax

iv. Annual filing of Income-tax returns

v. Tax audit of the Company in case required threshold limit of turnover is exceeded

vi. Transfer pricing audit of the Company in case of international transaction with associate enterprises

vii. Other compliance requirements viz. FATCA & CRS, Specified Financial Transaction reporting, etc. considering the specific transactions undertaken by the entity

b. Goods & Service tax

 i. Monthly payments & filing of GSTR 3B returns

ii. Monthly/ Quarterly filing of GSTR 1 returns (whichever applicable based on turnover)

iii. Annual reconciliations between GST records and Books of accounts

iv. Annual GST audit if turnover crosses specified threshold

v. Other GST compliances, as applicable

c. ROC Compliances

i. Appointment of auditors

ii. Maintenance of various registers under Company law (in case of Company)

iii. Holding of board meetings and AGM under Company law (in case of Company)

iv. Annual filings under Company & LLP laws

v. Other compliances, as applicable

d. RBI & FEMA Compliances

Where there is non-resident investment in the entity, certain filings & compliances will have to be done under the FEMA regulations to indicate various details to RBI authorities

e. Compliances under Other laws

 i. Monthly payment of PF, ESIC and Labour welfare funds (employer’s and employee’s contribution)

ii. Monthly/ Annual payment of Profession tax (whichever applicable)

iii. Monthly payment and return filing under Central Excise law

The above note has been drafting considering the normal business activities of an entity and should not be construed as inclusive. It is advisable to have a thorough discussion with a consultant considering the specific business segment before deriving to any conclusion.