Startups just cannot ignore Tax and Regulatory Compliances – An Overview
We find a very prevalent common phenomenon in the startup arena, where after an idea is born, the initial strategy to pursue the idea is made by bringing in employee, getting an entity (Company or LLP) incorporated, followed by the PAN and TAN, and opening a bank account. All set, let us do business now, and grow as big as it gets. End of chapter! Is it? Its certainly not.Ravi, founder of a mobile application company, denied funding on the grounds that the company does not maintain audited financial statements, nor has it filed the annual ROC returns and Income Tax returns. He says “I had few bank transactions and almost no business transactions during the initial phase, and therefore I did not find it important to do the needful.” We are now helping them to bring house in order.
After your Company or LLP is incorporated, some of the compulsory mandates which you are required to take care of are enlisted below. Let’s take a look.
- Obtaining Permanent Account Number (PAN)
- Obtaining Tax Deduction Account (TAN)
- Obtaining Import Export Code (IEC) – for exports of services and goods
- Obtaining Value Added Tax (VAT) – for engaged in trading business
- Obtaining Service Tax Registrations – for rendering of services
- Accounting and Book Keeping
- Statutory Audit under Companies Act, 1956
- Tax Audit
- Annual ROC filings
- Annual Income Tax Return filing
- Quarterly filing of TDS returns
- Monthly e-filing of VAT returns
- Half yearly filing of Service Tax Returns
- Maintaining of Statutory Registers, minutes books, holding Board Meetings, Annual General Meetings
Implications and Non-Compliance Penal Provisions:
PAN or Permanent Account Number
Implication: It is the mandatory requirement for all registrations, opening bank accounts, income tax return filing, TDS Return Filing and many more. In a nutshell, the Certificate of Incorporation and PAN are the two parent documents of a company or LLP.
Penal Provisions: There are no such penal provisions if the company or LLP do not apply for PAN. But in all practical circumstances, a company or LLP cannot operate without PAN.
TAN or Tax Deduction and Collection Account Number
Implication: It is required to be obtained by all persons who are responsible for deducting or collecting tax. It is compulsory to quote TAN in TDS/TCS return (including any e-TDS/TCS return), any TDS/TCS payment challan and TDS/TCS certificates.
Penal Provisions: There are stringent penal provisions for non deduction of taxes if required to, thus for all practical purposes , a company or LLP cannot deduct tax at source while making payment falling under the scope of Sec 192, 194 and 195 without TAN.
IEC or Importer Exporter Code Registration
Implication: The Importer Exporter Code, or IEC in short, is normally required by manufacturers and companies for international trade but with this new RBI ruling, the hundreds and thousands of freelancers, programmers, web designers and small companies who depend on PayPal for foreign payment will also have to apply for an IE code.
Penal Provisions: Companies or LLPs who does not fall under the import export category need not get IEC Code. In case they fall, IEC is a mandatory requirement.
VAT and CST or Value Added Tax and Central Sales Tax Registration
Implication: VAT registration is required for any business that is into sales either by way of trading, manufacturing etc. The units may to Proprietary, Partnership, Private Limited as the case may be. VAT registration comes in two folds – Compulsory or Voluntary. Compulsory VAT registration is based on the value of gross turnover / sales from trading business, which varies from state to state, since VAT is a state subject.
Penal Provisions: There are stringent penal provisions under the respective state laws for non registration and non-filing/ non compliance with the state VAT laws.
Accounting and Book Keeping
Implication: Section 209 of the Companies Act, 1956 requires every company to maintain proper books of account with respect to; (a) all sums of money received and expended by the company and the matters in respect of which receipts and expenditure takes places, (b) all sales and purchases of goods by the company (c) the assets and liabilities of the company, (d) in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of materials or labour or other items of costs as may be prescribed by the Central Government to any class of companies.
Penal Provisions: Proper books of accounts shall not be deemed to be kept with respect to the matters specified in Section 209(1) & (2), (a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions and (b) if such books are not kept on accrual basis and according to the double entry system of accounting [Section 209(3)]
The Managing Director, Manager or other Officers and employees who have violated sec 209 of the Companies Act, 1956 shall be liable to imprisonment for a term which may extend to 6 months or a fine of Rs. 10,000 or with both.
Statutory Audit under Companies Act, 1956
Implication: Section 224 of the Companies Act, describes the appointment and remuneration of the auditors. It says that every company should appoint an auditor or a number of auditors in every annual general meeting until the conclusion of the next annual general body meeting and shall within seven days of the appointment, give intimation to every auditor appointed in that manner. It is also provided that for any appointment or re-appointment made a written certificate shall be obtained from the auditors proposed to be appointed. In certain cases the auditors cannot be appointed without the approval of a special resolution by the company. He should be a Chartered Accountant under the meaning of the Chartered Accountant Act, 1949.
Penal Provisions: Unless the company auditor is not appointed by an appointment letter duly authenticated by the Board of Directors on the letterhead of the company, the auditor is not in a position to intimate his appointment to the Registrar of Companies by filing Form 23B. Non-filing of Form 23B can attract penalty up to Rs 5000.
Tax Audit under Income Tax Act, 1961
Implication: A company or LLP is required to undergo Tax Audit u/s 44AB by a Chartered Accountant mandatorily if the turnover of such company or LLP exceeds a threshold limit of Rs 1 crore (for company) or 40 Lacs (for LLP concern).
Penal Provisions: Non compliance of the provisions of this Act shall attract penalty under Sec 271B, which is computed as 0.5% of turnover, subject to a maximum limit of Rs 1 lac. Penalty can be levied upto Rs. 5,000 for non-filing of tax return u/s 271F.
Annual ROC filings (MCA)
Implication: As a part of Annual Filing, Companies incorporated under the Companies Act 1956, are required to file the following e-Forms with the Registrar of Companies (ROC):
Form 23AC: For filing Balance Sheet by all Companies
Form 23ACA : For filing Profit & Loss Account by all Companies
Form 20B : For filing Annual Return by Companies having share capital
Form 66 : For filing Compliance Certificate by Companies having paid up capital of Rs. 10 lacs
Form 21 A : For filing Annual Return by Companies not having share capital
Form 11: Annual Return of LLP
Form 8: Statement of Accounts and Solvency for LLP
Form 66, 23AC, 23ACA should be filed within 30 days from the date of AGM. Form 20B should be filed within 60 days from the date of AGM.
Every LLP is required to file Annual Return in Form 11 to the Registrar of Companies (ROC) within 60 days from the closure of financial year. An LLP has to close its financial year on 31st March every year. So, the Annual Returns has to be filed on or before 30th May every year. LLP are required to file such Accounts in Form 8 to the Registrar within 30days from the end of 6months of such financial year. The accounts are to be filed on or before 30th October every year.
Penal Provisions: Non-filing of the aforesaid forms can attract penalty up to Rs 5000 per form for companies. For LLPs, the penal provisions are more stringent compared to LLPs, where penalty is calculated @ Rs 100 per day of default, till date of filing.
To Conclude - The details being said and explained, it is of utmost importance, as well as evident from the mandatory requirements after incorporation of the company or the LLP, to consult with the consultant immediately after incorporation, what needs to be done next. It is also expressly suggested to always opt for a service provider who is providing end to end solutions, starting from startup counseling to entity registration to the annual compliances under one shelter.