The launch of Startup India campaign in 2016 has been instrumental in enabling many budding entrepreneurs around the country to live their aspirations. With limited knowledge and expertise in the area of direct and indirect tax being a major concern, many start-ups are facing hardships. In this article we explore the direct and indirect tax landscape of India and what startups ought to know about it.
Direct Tax
These are taxes on income and corporate profits. From a startup perspective, if the company is incorporated they are liable to pay income tax for the income generated over the fiscal year. Navigating the income tax environment is quite complicated because of the multiple compliance requirements and due dates. We shall break some of them down below.
Key Concepts of Direct Taxes
Tax deducted at source (TDS): The concept of TDS deduction is to ensure that all employed individuals file their income tax returns properly. In this case, the startup will be cutting TDS from the employee’s salary.
Quarters | Deadline |
Quarter 1 | July 15 |
Quarter 2 | Oct 15 |
Quarter 3 | Jan 15 |
Quarter 4 | May 15 |
Form | Category |
Form 24Q | TDS from salaries |
Form 26Q | TDS on payments other than salaries |
Form 27Q | TDS on any sum payable to non-residents |
Tax filing
Time limit or Due date for the companies for filing returns under Section 139 (1) is October 31 of the assessment year. In case the transfer pricing provisions are applicable, the due date for filing of the tax return is on or before 30 November.
Companies filing their return after the due date will have to pay interest under Section 234A and a penalty under Section 234F( Belated Return)
Filing of ITR after the due date will incur a late fee of Rs.5,000, which shall be reduced to Rs.1,000 if the total income is below Rs.5 lakh.
If a company files a loss return after the due date, many losses, like business and capital losses, cannot be carried forward for set off in the subsequent years and it will be liable to pay interest at a rate of 1% per month or part month on the unpaid tax amount.
Advance Tax
Advance Tax is mandatory to businesses that have a tax liability of more than INR 10,000. According to 234C of the Income Tax Act, any shortfall or failure in payment of advance tax attracts a penal interest of 1% per month until thorough tax payment.
The Eligibility For Startup India Scheme
Government and their incentives and exemptions for Income Tax levitation on Start-ups in India is enhancing in every budget but to be eligible for it the company have to meet the necessary criteria mentioned below:
The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
Turnover should be less than INR 100 Crores in any of the previous financial years
An entity shall be considered as a startup up to 10 years from the date of its incorporation
The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a "Startup.
Key Tax exemptions
Tax Holiday Of 3 Years: Companies incorporated after April 2016 can avail themselves of a 100% tax rebate on their earnings for a period of 3 years within a 7-year block. But their annual turnover must not exceed 25 crores in any of the preceding financial years.
Capital Gains Tax Exemption: With a new Section 54 EE of the Income-tax Act, startups can avail an exemption from long-term capital gains tax, given that the capital gains are invested in a fund notified by the Central Government within 6 months from the date of asset transfer. The maximum allowable investment is Rs. 50 lakhs, with a minimum holding period of 3 years, failing which will attract tax to the same.
Investments Above Fair Market Price: There are exemptions on the investments above the fair market value in the startups. These investments include the investments made by angel investors, family members or incubators or any fund which are not included in the capital funds (Angel Tax).
Indirect Tax
The Goods and Services Tax (GST) of India is an indirect tax system which replaced multiple taxes like service tax, value-added tax (VAT), excise, etc. to become one unified indirect tax structure of India. Companies dealing in Goods and services above the threshold limit are required to get registered under GST act for the payment of tax.
Multiple registrations
Multiple registrations which were earlier present in the indirect structure like Multiple VAT registrations are no longer necessary for businesses.
Composition Scheme
The Composition Scheme (Section 10) permits startups and small businesses whose annual turnover is up to Rs.1.5 Crore and those who deal only with manufacturers of goods, dealers, and restaurants (not serving alcohol) to pay lower rate of tax with quarterly payment of taxes and lower number of returns than usual. The turnover of all businesses with the same PAN has to be added up to calculate the turnover for the purpose of the composition scheme
Registration
The threshold limit for registration and payments was increased to Rs 20 lakh/40 lakh under the GST act whereas a start-up that had a turnover of more than Rs 5 lakh had to pay a huge amount of tax in the form of VAT earlier.
GST returns filing
All GSTR filings are done on a single online on the GST portal conveniently. All GST registered businesses have to file monthly or quarterly GST returns and an annual GST return accordingly.
Filing of GST return over the due date will attract a late fee of Rs 100 per day, aggregating maximum up to Rs 5000
Annual return, late fee of Rs 100 per day aggregating maximum up to 0.25% of quarterly turnover
An interest of 18% per annum shall be calculated on the Net tax liability from the next day of filing due date till the actual date of payment.