Legal Aspects for a Start Up

Axia Advisory Services Pvt Ltd

Legal Aspects for a Start Up

Presented by CA Mehul Mukatifor

ET Power Of Ideas WorkshopCIIE, IIM - Ahmedabad


Outline

• SSI vs MSME• Choosing your vehicle• Companies• Taxation• Other Legal aspects

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SSI vs MSME

• SSI – Small Scale Industries• MSME – Micro, Small and Medium Enterprises– Certification / Registration

Type ServiceEquipment Value

ManufacturingP&M Value

Micro < Rs10 lakhs < Rs5 lakhsSmall < Rs2 crores < Rs5 croresMedium < Rs5 crores <Rs10 crores

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Entity Choice

• Service area or product development• No of people – partners, employees, etc• Time to test your service / prototype your

product

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FormationProprietor Partnership LLP Company

Incorporation Documentation

None Agreement / Deed

Incorporation Agreement

MoA / AoA

Min Capital Least Minimal Rs500 Rs1 lakh

Personal Liability Unlimited Unlimited Limited Limited

Flexibility Very High High Medium Medium - Low*

Remuneration to owners

Fully Flexible Partial Restriction

Partial Restriction

Partial Restriction

Record Maintenance

Low Medium Medium High

Eff Tax Rates Slab 30.9% 30.9% 30.9% / 32.445%#

MAT NA NA MAT MAT

Eff MAT Rate 19.055% 19.055% / 20.01%#

* High degree of legal compliance / formalities# surcharge applicable if revenues > Rs1 crore

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In all forms of entity

• Need to maintain proper income and expenditure records

• Obtain tax numbers:– PAN / TAN / Service Tax / VAT / Sales Tax

• PAN / TAN / Service Tax process simplified– Anyone can apply online and then send the

documents to the relevant officeOR– Go to the nearest facilitation centre and submit

the form and documents

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Partnership

• Proper agreement (deed)– Capital share– Profit share vs Loss share– Duties, responsibilities, and authority

• Salary paid to partners deductible as expense– Taxable in hands of individual

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Limited Liability Partnership (LLP)

• Agreement Deed / Incorporation Agreement (as previous)

• LLP Act, 2008– Minimum 2 partners, at least 1 resident– DPIN to be obtained– audit subject to limits– Annual Filings• Statement of Accounts and Solvency to be filed within

six months from end of financial year• Annual Return to be filed within 60 days of end of

financial year

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Limited Liability Partnership (LLP)

• Exemptions from audit available– Turnover– Contribution– But needs to be certified by designated partners

• Maximum Remuneration*– Profit ≤ Rs3 lakhs Rs1.5 lakhs/90% of profit– Profit > Rs3 lakhs 60% of incremental profit

* same as a traditional partnership firm

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Private Limited Company

• All Directors need DIN• Other mandatory provisions:– Quarterly board meetings– Intimation to Registrar of Companies– Audit

• More Legal Requirements

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Annual Filing – RoC

• Balance Sheet• Profit and Loss Statement• Annual Return• Compliance Certificate– If capital between Rs10 lakhs and Rs2 crore

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Other Filings – RoC

• Mortgage• Cost Audit Report, if applicable• Increase in Authorised / Paid Up Capital• Change in Directors, if any

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Companies Act

• Board Meetings– At least one each quarter– No maximum limit– Whole-time / promoter directors no sitting fees– Can be held anywhere and at any time

• Registers to be maintained• Audit requirement– Audit fees cannot be % based– Auditor can claim reimbursement of expenses

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Companies Act

• Annual Return to be filed within 60 days of General Meeting

• Can accept deposit only from Director / Member / Relative

• AGM to be held within max 15 months• On working day and during working hours• Appointment of Statutory Auditor• Change in Directors

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Companies Act

• Can issue DVR shares– Cool off period 3 profitable years

• Specific format of P&L / Balance Sheet

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Companies Act – No Worry On

• Audit Committee• Directors rotation / retirement• Ceiling on managerial remuneration• Time-limit for managing director

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Dividends

• To be deposited in separate bank account within 5 days and paid within 30 days

• Prerequisites– Provision for depreciation– Transfer to general reserve– No default in redemption of preference shares

• Need to pay DDT @ 16.22%• Not Taxable in the hands of recipient

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Income Tax – Due Dates

• Advance Tax payments– Calculated on the estimated profit for the year• 15th June 15% ---• 15th Sept 45% 30%• 15th Dec 75% 60%• 15th Mar 100% 100%

• Annual Returns to be filed– Audited / Partner of such firm 31st Oct– All others 31st July– Ensure loss returns are filed in time

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Income Tax - Requirements

• Maintain Books of Accounts for 8 years• Form of entity does not matter• Audit Limits based on revenues– Business > Rs60 lakhs (Rs40 lakhs)– Profession > Rs15 lakhs (Rs10 lakhs)– Mandatory for companies irrespective of revenue

• Statutory Dues / Taxes can be claimed only if paid within respective due dates

Remember: advantageous if bills are generated in name of entity

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Income Tax – Expenses Claim

• Depreciation on WDV : vehicle, computers & peripherals, mobile– 30 September vs 31 March– Can be carried forward indefinitely

• Service Tax/Sales Tax/VAT Input– Availability of set-off

• Rentals– Receiver can claim flat maintenance cost of 30% of

rentals: no bills are needed• Income tax applicable only on balance amount

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Income Tax – Expenses Claim

• Other Company Expenses– can vary from puja expenses in the office,

newspapers, office materials, water, electricity, telecom, security, etc.

– Claimed by the company and not by the directors– Proper bills will be needed in company name

• Salaries & Reimbursements– Employees– Directors / Promoters

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Income Tax –Salary Payments

• Optimum Salary: Rs3.30 lakhs / year– New tax slab limit Rs. 1.8 Lakh– 80C benefits Rs1.1 Lakh– Medical insurance Rs15,000/Rs35,000?– Others: medical, conveyance, children education– If above 60 / 80 yrs Rs4.15 / 6.15 lakhs

• Other Direct Payments to Directors– Rentals– Consultation Fee– Commissions 1% / 3% of Net Profits

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Income Tax – Deductions

• Sec 80HHC – Export of Goods– Export of goods / merchandise– Certificate issued by Export House / Trading House

• Sec 80HHE – Software / Tech Services Export– Buyer / Auditor certificate

• Common to above– Payment in Convertible Foreign Currency– Proportionate to Total Revenue / Profits

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Income Tax – TDS

• Onus on payer to deduct TDS• TDS to be deducted on all bills / payments• TDS to be deposited each quarter / month• PAN not quoted = higher TDS

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Income Tax – TDSHead Exempt Upto When Deposit

DueCert Due

Salary Min Slab Payment 7th of next month

Form 16 on / before 31 May

Interest Rs5,000 p.a. Payment / Credit

7th of next month

Form 16A, 31 Jul, 31 Oct, 31 Jan, 31 May

Contractor Rs30,000 / contract ORRs75,000 p.a.

Commission Rs10,000 p.a.Professional Rs30,000 p.a.

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Service Tax

• Wide range of services covered, including most common – consultancy, advisory, etc.– Exception: Export, if receipts in foreign currency

• Applicable if revenue ≥ Rs10 lakhs– Based on providers’ revenue– Need to register• once revenue crosses Rs9 lakhs in previous year• Within 30 days

• Set-off available – now a grey area• Effective Rate = 10.3%

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Service Tax Procedure

• Apply to Superintendent of Central Excise– Single Registration for all services– PAN mandatory for ST registration

• Need to issue bill / invoice within 14 days of completion of service– Signed and numbered– Details / description of service provided• Service tax amount to be shown separately

– Name & Address of provider / receiver of service• ePayment mandatory if ST ≥ Rs.10 lakhs

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Service Tax

• Payment– 5/6th of quarter end (ex Mar) Individual / Firms– 5/6th of month (ex Mar) Others

• Returns: Half Yearly – 25th Oct / 25th Apr• ST applicable on full bill value– Including TDS deducted

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Excise Duty

• Excise Duty– Only manufacturers– Payment by 5th / 6th of next month / quarter• SSI Quarterly; others each month

– Returns• SSI 10th after end of quarter; others 10th of next month

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RBI / FEMA

• RBI Regulations / FEMA– Imports: Equipment– Exports: Software / Services

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Provident Fund (PF)

• Mandatory if– ≥ 20 employees and– Salary ≤ Rs6,500/month

• Exceptions– Company PF Trust– “excluded” employee

• Deductions– 12% of Basic + DA– Matching contribution by employers

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Shops & Establishments Act

• Mandatory in all cases (except if it is a factory)• Fees depends on number of employees

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ESIC

• Mandatory if– Manufacturing using power ≥ 10 employees– Others ≥ 20

employees– Salary ≤ Rs15,000 / month

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Professional Tax

• State subject– Maharashtra, Karnataka, West Bengal, Andhra

Pradesh, Gujarat, Tamil Nadu, Madhya Pradesh

In Maharashtra• Mandatory in all cases• Amount depends on Salary

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Things to Remember

• Always issue a Bill / Invoice– Name & Address: both provider and receiver– Serial Number– PAN / TAN number– Service Tax Registration Number– Description of service / goods: each class

separately– TDS / Service Tax / Education Cess / Higher

Secondary Education Cess separately shown

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Private Company Sweat Equity

• Only of class of shares already issued• Special Resolution passed in General Meeting• Resolution to specify– number of shares– consideration, if any– class / classes of directors / employees to whom

such equity shares are to be issued• Company should be at least 1 year old• To be at a fair price calculated by an

independent valuer

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Thank You

CA Mehul MukatiAxia Advisory Services Pvt Ltd


DIN Process

• Only eForms with scanned documents• eForm can be submitted by person, if he/she

has valid DSC• eForm can be digitally signed by CA / CS as

proof of having verified documents– If so done, DIN will be approved immediately

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Normal Procedure (1/2)

• Obtain DSC / DIN• File for approval of proposed name to ROC• Get MoA & AoA vetted by ROC and printed• Apply for stamping of the MoA & AoA• Obtain CoI from RoC• Open Bank Account• Obtain a company seal• Obtain PAN / TAN• Value Added Tax (VAT) / Sales Tax / Service Tax

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Normal Procedure (2/2)

• Register under– Shops and Establishment Act – Profession Tax– Employees' Provident Fund Organization (EPFO)– ESIC (medical insurance)– Factories Act

• Filing for Government Approval before RBI/FIPB for Foreigners and NRI's

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How to e-File Documents

• Company representative– Upload e-Forms on MCA21 portal through the

‘Annual Filing Process’ link• Prepare e-Form and submit on CD to

Temporary Facilitation Offices (10-12 cities only) / Registrar’s Front Offices (RFO).

• Prepare e-Form and submit through Certified Filing Centers

• Either the director who has DSC or practicing CA / CS can file on behalf of the Company

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• Procedure– IP / know-how / value addition valued by valuer;– Valuer to justify valuation in report;– Company to send valuation report to shareholders– Treated as managerial remuneration, if:• Sweat equity shares issued to director / manager;• Issued for non-cash without resulting in an asset

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• Taxation: Not a Perquisite, if– Plan / Scheme as per SEBI Guidelines• For both unlisted and listed companies• Person holding >10% equity ineligible

– Copy of Plan / Scheme submitted to CIT• Submission only, no approval required

– Conditions of Plan / Scheme have not changed• Regulatory Compliance– Within 30 days of allotment

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