It takes less time to do a thing right, than it does to explain why you did it wrong.Henry Wadsworth Longfellow
While the Indian startup ecosystem is evolving, the myriad of compliances and legal aspects continue to be a thorn in the ecosystem. The actual requirements are quite daunting, the goal here is to pen down some of the key aspects pertaining to compliance and legality.
No matter how innovative your idea might be, it needs to abide by the law of the land. The Government does play a role in the survival of startups after all.
Startup compliance covers everything from keeping a track with meetings, to following the IRS Tax code. Startup compliance is an ongoing process and businesses need to ensure that they are following the rules set up by the Government. If a business fails to keep up with the laws and requirements, it may incur a variety of fines.
Annual Compliance Checklist
- Income Tax Filing: The financial year in India is from 1st April to 31st March. At the end of each financial year, all corporate bodies are required to file for their Income Tax return. For startups, it is mandatory to file for a return even if they haven’t earned any profit for the financial year.
However, the Government has launched a scheme under the Startup India Program (2016), ‘Eligible Startup’. The following is the eligibility for the Startup India Program:
- Being incorporated or registered in India for less than 7 years and for biotechnology startups up to 10 years from its date of incorporation.
- Annual turnover not exceeding Rs 25 crores in any of the preceding financial years.
- Aims to work towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
- It is not formed by splitting up or reconstruction of a business already in existence.
- It must obtain certification from the Inter-Ministerial Board setup for such a purpose.
- It can be incorporated as a private limited company, registered partnership firm or a limited liability partnership.
The following are the Tax exemptions allowed to eligible startups under the Startup India Program:
- 3 year tax holiday in a block of seven years: The Startup incorporated after April 1, 2016, is eligible for getting a 100 % tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year. This will help the startups to meet their working capital requirements during their initial years of operation.
- Exemption from tax on long-term capital gains: A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then exemption will be revoked in the year in which money is withdrawn.
- Tax exemption on investments above the fair market value: The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.
- Carry forward losses or capital gains: The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of previous year in which such loss is to be carry forward.
2. Goods and Services Tax return filing: Goods and Services Tax is an indirect tax which has replaced other taxes like Excise duty, Vat, Services tax, etc. GST is levied on the supply of goods and services and is a comprehensive, multi-stage tax that is levied on every value addition.
If a startup has a turnover of more than Rs 20 Lakhs in a year, it needs to get registered under GST. However, in the case of some special states, the startup needs to get registered if the turnover is more than Rs 10 Lakhs in a year. If the startup is in the field of e-commerce, it is compulsory for it to get the GST compliance done.
Due to GST, startups can now benefit from tax credit on purchases. Not only this, but also the process of registration and filing returns under GST is now online, which has made it more convenient for startups. Startups that are amidst a cash-crunch stand to gain financial benefits from GST.
3. License Compliance: With a much higher threshold for registration, tax credits on purchases, and ease of processes, GST has definitely brought relief to startups and smaller companies in India. Though, there are a license compliances to be carried out in regularity with income tax and GST filings:
- Renewal of Licenses: Every corporate body is required to obtain a license within 30 days of commencing a business. The license varies according to the type of activity the startup is involved in.
- Business Equipment Compliance: Startups that acquire business equipment need to ensure that it is in a proper condition and also need to maintain the acquired equipment.
- Internal Company Compliance: Every startup needs to adhere to internal company compliances. The following are the two main internal company compliances:
- Annual General Meeting (AGM): Every company/startup needs to have one AGM every year with a maximum gap of fifteen months within two AGMs.
- Board Meetings: The first board meeting of the Board of Directors should be held within 30 days of the incorporation of the company. There should be a minimum 2 meetings, one in each calendar year. There should also be a gap of 90 days between two meetings.
The Companies Act, 2013
Companies Act 2013 regulates the formation of a company, its responsibilities, directors, dissolution and overall functioning of a company.
The following are the salient features of the Companies Act, 2013:
- The Companies Act, 2013 has introduced the concept of ‘Dormant Companies’. Dormant companies are those companies that haven’t engaged in any business activity for over two years.
- It has introduced the National Company Law Tribunal or NCLT.
- It encourages self-regulation in terms of disclosure and transparency instead of a government approval based regime.
- Documents can now be maintained in an electronic form.
- The procedure for mergers and amalgamations have been made faster and simpler.
- The concept of a one-person company(OPC) has been introduced. This is a new type of private company which may have only one director and one shareholder.
- The Act makes it mandatory for companies to form CSR committees, and formulate CSR policies.
- The Act offers more power to shareholders in that it provides for shareholders’ approval for many major transactions.
- The Act mandates at least 7 days of notice for calling board meetings.
- Norms have been made stringent for accepting deposits from the public.
The Companies Act states that a company may be formed for any lawful purpose by:
- 7 or more persons, where the company to be formed has to be a public company.
- One or more persons, where the company to be formed has to be a private company.
- One person (1), where the company to be formed has to be a One Person Company (One Person Company Is considered to be a private company).
- Application for availability of name for the company: According to the Companies Act, the name stated in the Memorandum of Association-
- Shall not be identical with or resemble the name of any existing company.
- Shall not be such that its use by the company constitutes an offence under any law.
- Shall not be such that its use by the company is undesirable by the Central Government.
Note: Earlier provision of six names has been replaced by a new web service called, ‘RUN’- Reserve Unique Name. Now only two names are to be provided in the order of preference, by filling the form RUN. This is applicable for new as well as existing companies.
- Preparation of Memorandum and Articles: The Memorandum of Association (MOA) is the charter of a company. It defines the area within which the company can operate. Memorandum of Association (MOA) shall state the name, registered office, objects, liability of members, share capital (in the case of a company having share capital). In case of One Person Company(OPC), the name of the person who, in the event of death of the subscriber, shall become the member of the company.
- Filing of documents with the Registrar of Companies: An application is to be made in Form No. INC 32 along with the following documents, as per section 7(1), with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated:
- Memorandum and Articles: Memorandum and articles of the company, duly signed by all the subscribers to the memorandum in the prescribed manner must be filed.
- Declaration by Advocate, C.A, etc : A declaration must be filed In the prescribed form by an advocate, a chartered accountant, cost accountant or company secretary in practice and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made thereafter have been complied with.
- Declaration from subscribers and first directors: A declaration must be filed by each of the subscribers to the memorandum and from persons named as the first directors (if any) in the articles and who is not convicted of any offence in connection with the formation or management of any company.
- The declaration should also contain that the person hasn’t been found guilty of any fraud or breach of duty to any company under this Act or any previous company law during the preceding five years.
- It should also contain that all the documents filed with the Registrar for the registration of the company contain information that is correct and complete and true to the best of the person’s knowledge and belief.
- Address for communication: The address for communication must be given till the registered office is established. As per Section 12, a company is required to have a registered office within 30 days of incorporation.
- Particulars of the interests of the persons named as first directors: The particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed must be filed.
Note: All the documents are to be filed electronically authenticated by digital signature. Manual filing of documents is not allowed now. Therefore, a company can be registered only online.
- Issue of Certificate of Incorporation by Registrar: Section 7(2) states that the Registrar on the basis of the documents and information filed under Section 7(1) shall register all the documents and information referred to In Section 7(1) in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act.
Allotment if corporate identity number: Section 7(3) states that on and from the date mentioned in the certificate of incorporation issued under Section 7(2), the Registrar shall allot to the company a corporate identity number, which shall be distinct identity for the company and which shall also be included in the certificate.
Documents of incorporation to be preserved: Section 7(4) provides that the company shall maintain and preserve at its registered office copies of all documents and information as originally filed under Section 7(1) till dissolution under this Act.
Effect of Registration (Section 9): From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the Memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the Memorandum.
- It is capable of exercising all the functions of an incorporated company under this Act.
- It has perpetual succession and a common seal.
- It has power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible.
- It is capable of entering into contracts. It can sue and be sued, by the said name.
ONLINE REGISTRATION OF A NEW COMPANY
Incorporation or registration of a company is the most important step in the formation of a company. Currently, a company can be registered only online.
Registration or incorporation of a company means the legal process used to form a company. After completion of the process of incorporation, the company comes into existence having a separate corporate identity from its owners. The process of incorporation is completed with the Registrar of companies of the state in which the registered office of the company is to be situated.
MCA-21 is the e-governance programme of the Ministry of Corporate Affairs which has simplified the process of incorporation of a company.
The following steps need to be taken for online registration of a company:
- Obtain Digital Signature Certificates: As per the Information Technology Act, 2000, Digital Signature means authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of Section 3.
- For online registration of a company, the application for incorporation is to be signed electronically. This can be done by the use of digital signatures on the documents submitted in the electronic form to ensure safety and authenticity of the documents.
- This is the requirement also under the MCA-21 e-governance programme of the Ministry of Corporate Affairs because every document filed with the Registrar in connection with incorporation has to be signed electronically. Therefore, it is necessary to obtain a digital signature certificate for the signatories to the Memorandum and that of the proposed directors.
- Obtain Director Identification Numbers: Director Identification Numbers (DIN) is a unique identification number. As per section 152(3), no person shall be appointed as a director of a company, unless he has been allotted a Director Identification Number.
- All or some of the subscribers to the Memorandum may be appointed as first directors of the company.
- Therefore, it is necessary that Director Identification Number must be obtained for all the proposed directors of the company to be incorporated.
- Role Check: This step verifies whether the digital signature affixed on the e-form belongs to the person concerned such as proposed director, subscriber, etc. and whether Digital Signature Is registered on the MCA portal. If the Role Check verification fails, the e-form will not be uploaded.
- Select and get the approval of the proposed company name: The persons desirous of forming a company are required to select a suitable name for the proposed company.
- Since the earlier provision of six names has been replaced by the new web service, RUN, now only two names are to be provided, in order of preference.
- The name can be applied by availing the services of RUN on the MCA portal by filling the form RUN, along with the prescribed fee.
- If a proposed name is not available, the applicant has to apply for a fresh name. After approval, the Registrar will issue the name availability letter. The Registrar may reserve the name for a period of twenty days from the date of approval in the case of a new company.
- File Form No. INC 1 32: Along with necessary documents, scrutiny of documents by the Registrar and Receipt Certificate of Incorporation: After the approval of the name, the applicants are required to file an application in Form No. INC 32 for incorporation with the Registrar of Companies.
For this purpose, the company needs to prepare Memorandum of Association and Articles of Association, if it has not already. The stamping needs to be completed as per the Indian Stamps Act. Stamp duty can be paid electronically on the Ministry of Corporate Affairs portal. Memorandum and Articles must be signed by at least 7 members in case of public company, two in case of private company and one in case of One Person Company.
COMMENCEMENT OF BUSINESS
10A. (1) A company incorporated after the commencement of Companies (Amendment) Ordinance, 2018 and having a share capital shall not commence any business or exercise any borrowing power unless-
- A declaration is filed by a director within a period of 180 days of the date of incorporation of the company in such form and verified in such manner as may be prescribed with the Registrar that every subscriber of the Memorandum has paid value of the shares agreed to be taken by him or her on the date of making such a declaration.
- The company has filed with the Registrar a verification of its registered office as provided in subsection (2) of Section 12.
(2) If any default is made in complying with the requirements of this section, the company shall be liable to a penalty of Rs 50000 and every officer who is in default shall be liable to a penalty of Rs 1000 for each day during which such default continues, but does not exceed an amount of Rs 1 Lakh.