Legal Aspects for a Start Up

Presented by CA Mehul Mukati

for
ET Power Of Ideas Workshop
CIIE, IIM - Ahmedabad

Axia Advisory Services Pvt Ltd

 Outline
2

• 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 Service Manufacturing
Equipment Value P&M Value
Micro < Rs10 lakhs < Rs5 lakhs
Small < Rs2 crores < Rs5 crores
Medium < Rs5 crores <Rs10 crores

Axia Advisory Services Pvt Ltd

 Entity Choice
4

• Service area or product development

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

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Formation
Proprietor Partnership LLP Company
Incorporation None Agreement / Incorporation MoA / AoA
Documentation Deed Agreement
Min Capital Least Minimal Rs500 Rs1 lakh
Personal Liability Unlimited Unlimited Limited Limited
Flexibility Very High High Medium Medium - Low*
Remuneration to Fully Flexible Partial Partial Partial Restriction
owners Restriction Restriction
Record Low Medium Medium High
Maintenance
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 office
OR
– Go to the nearest facilitation centre and submit
the form and documents

Axia Advisory Services Pvt Ltd

 Partnership
7

• 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

Axia Advisory Services Pvt Ltd

 Limited Liability Partnership (LLP)
8

• 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

Axia Advisory Services Pvt Ltd

 Limited Liability Partnership (LLP)
9

• 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

Axia Advisory Services Pvt Ltd
 Private Limited Company
10

• 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 – TDS
Head Exempt Upto When Deposit Cert Due
Due
Salary Min Slab Payment 7th of Form 16 on
next / before 31
month May
Interest Rs5,000 p.a. Payment 7th of Form 16A,
Contractor Rs30,000 / / Credit next 31 Jul, 31
contract OR month Oct, 31 Jan,
Rs75,000 p.a. 31 May
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
Axia Advisory Services Pvt Ltd
 Thank You

CA Mehul Mukati
Axia Advisory Services Pvt Ltd

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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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Private Company Sweat Equity
• 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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Private Company Sweat Equity
• 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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