A Start-up’s Guide on The Basics of Taxation

Many incentives were notified by the GOI in the Union Budget of 2016, to levy the provisions of income tax for start-ups in the country. In the Union Budget of 2017, the incentives were enhanced further to include individuals as well, who wish to start their new business or ‘start-ups’.

Running a start-up is filled with excitement with new things to learn and new challenges to face. But after the initial hoopla has fizzled out and you start looking at hard numbers, the basics of taxation will be the first thing to hit you.

Many consider the start-up life a grand celebration — a place where everyone is pampered, and everything goes as planned. For the outsider, things may look rosy. But for the insider, it is about understanding things you never thought you had to.

Only the entrepreneur who has jumped on the start-up paddle knows what it exactly means to lead one. The journey starts with nothing going your way, and you have to pull things together to make them work. You encounter newer obstacles every day. One such obstacle is taxation, which can only be overcome by knowing the basics of taxation. So, let us check out the taxation rules and learn the basics of taxation, as mentioned in this article.

Eligibility conditions for start-ups

To become eligible as a ‘start-up’, a new business has to fulfil various criteria as mentioned below:

  • The business should be set up as a company or an LLP (Limited Liability Partnership).
  • The company should be established between the dates April 1st, 2016 and April 1st, 2021 (according to the Finance Act, 2018, the due date has been extended to 2021).
  • The company’s maximum turnover should be Rs 25 crores.
  • The new entity must not be the outcome of splitting up or reconstruction of an existing business.
  • The new company should receive the certification of being an Eligible Business from the Inter-Ministerial Board of Certification. Obtaining this certification implies that the start-up is concentrating its efforts on innovation, implementation, commercialisation or development of modern services, products or processes, that are intellectual properties or driven by technology.

Income tax rules for start-ups

Many incentives were notified by the Indian government in the Union Budget of 2016, to levy the provisions of income tax for start-ups companies in the country. In the Union Budget of 2017, the incentives were enhanced further to include individuals as well, who wish to start their new business or ‘start-ups’.

Here is a quick overview of the income tax incentives that start-ups can benefit from:

  • During the Union Budget 2016, the Government of India announced a 100% tax reduction for all start-ups deemed eligible, under Section 80-IAC of the Income Tax Act.
  • Under this new scheme, all start-ups incorporated between April 1st, 2016 and April 1st, 2021 are eligible for a 100% tax reduction on any tax paid for three years during the initial seven years of operations.
  • The start-up has the option to choose any three years out of the initial seven years of its operations, for tax reduction.
  • All the eligible start-ups that qualify for tax reduction benefits and wish to avail the tax incentives should follow the steps as mentioned below:
    These start-ups should create and maintain different account books for their Eligible Businesses.
    ◊ The company should provide its audit report with Form 10CCB, along with their income tax return certificate.
    ◊ A certified Chartered Accountant should have audited the company accounts.

Basics of taxation for start-ups

Every start-up business should get registered for three main types of taxes — Service Tax, Value Added Tax (VAT), Central Sales Tax (CST).

Service tax

  • It is levied when work is done for an organisation or a person, or when a service is provided to the customer.
  • The gross turnover of the start-up business should be above Rs 9 lakhs to qualify for taxation.
  • March 31st of every year is the deadline to pay this tax.

Value Added Tax or VAT

  • VAT is a state tax, governed by the legislation of respective states.
  • The gross turnover should be above Rs 5 lakhs to qualify for taxation.
  • The 15th of every month is the deadline to pay this tax.

Central Sales Tax or CST

  • CST is governed by the Central Sales Tax Act, 1956.
  • There is no minimum or maximum limit to qualify. However, the tax is compulsory after an inter-state sale.
  • The 20th of every month is the deadline to pay this tax.

These are the three main types of taxes which any start-up owner should be mindful of. Apart from the ones mentioned above, other crucial dates that a start-up owner should remember are:

  • September 30: It is the due date for a company to file income tax returns. Every single entity must file their ITR returns, regardless of whether any monetary transaction was undertaken by the company or not during that particular financial year.
  • October 30: it is the final date to submit the Annual Financial Statement along with a complete Registrar of Companies.

Essential tips for start-ups

To get the ball rolling, here are a few key points that any start-up enterprise should know about and apply all the time.

  • A start-up should always create and maintain a physical record of each financial transaction done by the business. These records are proof of the transaction done by the enterprise. They come in handy while supporting the claims in the Annual Financial statement of the company. Plus, these proofs help you solve any discrepancies in the final report. Salaries paid to employees, payments done towards the purchase of raw materials, and other expenditures are the crucial elements that should be recorded and maintained regularly.
  • The start-up should always do their income tax return filing on or before the due date to avoid any hassles while claiming returns. It is vital for any business, irrespective of their financial activity for the current financial year, to file ITR returns. If a company misses the deadline for submitting income tax returns, then every month, the company should pay extra charges of 1% interest from the due date to the date of ITR filing. These charges are collected as a penalty for late income tax returns filing or returns.
  • If the gross turnover of the company is more than Rs 40 lakhs in the current financial year, then it becomes mandatory for the company to undergo audits periodically, as notified by the LLP Act.
  • The Registrar of Companies should be submitted by the business every year, to the Corporate Affairs Ministry. If the company fails to do so, the ministry may force them to close their business.

A tax consultant can give you all the information you need about indirect tax, basic tax and other tax rules. Alternatively, connect with our expert team; they handle all compliance needs for startups and other companies.

The article covers all the basics of taxation that a start-up needs to know. The current environment is very conducive for a start-up to grow and thrive. And with a plethora of tax incentives, the future is bright for the start-up sector.

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