For startups tax compliance is critical.
- As businesses in the early phases of development, startups are preoccupied with expansion and find it difficult to prioritize tax compliance for startups. There is extraordinarily little time and resources left for compliance after developing marketing tactics and attempting to establish a brand identity. Many businesses may lack the financial means to hire a dedicated CFO or a tax team to manage compliance.
- A startup tax compliance that operates as a private limited company must adhere to various regulations set forth by numerous statutes and regulatory agencies. This includes, but is not limited to, filing tax and other returns regularly, holding board and other meetings, keeping statutory books and accounts, and so on.
- Over time, the Indian compliance landscape has evolved to become more interoperable and transparent. The implementation of GST aided the government in digitizing papers and allowing them real-time access to taxpayer transactions.
It is critical to concentrate on growth, but so is tax compliance.
- Startup tax compliance services may miss the threats to their profitability and growth by putting tax compliance on the back burner. Until recently, businesses were not aware that tax payments might be used to reduce cash outflows and increase working capital. And because startups are often cash-rich, they overlook the link between tax compliance for startups and increased cash flow.
- However, there is currently room for working capital efficiency, especially with the new rules restricting input tax credit (ITC) claims to the extent that vendors supply invoices. From the start, startups must streamline their GST compliances and make use of the potential to optimize their working capital.
For startups, the cost of non-compliance is high.
- Noncompliance now comes at a larger price than before. Companies must now be concerned that non-compliance could harm their working capital and profitability, tarnish their brand, and, in extreme situations, cost them their GST registration.
- Most of them have no idea how much money they could lose if they do not comply when it comes to startups. They require financial assistance. Offshore investors are also leery of investing in a non-compliant company. The temptation to stay tax compliant increases as firms approach Series B and Series C funding, especially if investors outside India take compliance seriously. Non-compliance with any legislation could have profound consequences.
- The acquirer performed due diligence on the acquiree, i.e., the Indian startup, to ensure compliance with different business and tax rules. They could not afford to have their stock values in the United States damaged because they were a publicly traded firm. As a result, if entrepreneurs, particularly e-commerce businesses, intend to sell their company in the future, they should implement strict compliance controls from the outset.
To maintain their tax compliance, companies can't ask for much more.
- By bringing in the correct technology, startups can streamline their compliances, decrease their compliance risks, and increase their working capital. In an era of automated return files, AI-powered reconciliations, and smart reports available for managerial decision-making, startups cannot ask for much more in terms of tax compliance. Tax compliance is essential for enabling and maintaining growth. Cash flows, on the other hand, are as crucial.
- Startups want a tech-based compliance partner who can inform them how much money they are wasting with each tax return they file. Reduce their interest and penalties to a minimum, and they'll need the correct technologies. To increase their working capital, they need to put in place tax-saving methods. They require reconciliations to be completed and reports to be prepared with the click of a button, as stakeholders constantly require information. And the only way they can obtain all of this is to digitize their tax returns.
Using technology, TDS compliance difficulties can be overcome.
- An Indian online grocery startup that solved its TDS compliance challenges using technology. The company was using the utility provided by the government and the data exported from its payroll to file its TDS returns each month. However, they were affected by multiple challenges along the way. They could not detect if the data inputs were as per TDS tax codes. They received several notices for previous periods' TDS returns, despite the accurate data entered. The TDS software was not user-friendly and hard to navigate. They were also unable to do PAN validations in a scalable and secure manner, amongst other issues.
- The cloud-based SaaS platform's solution offered additional features to identify the reasons for the notices being received and promptly file the appropriate adjustments. Using an inbuilt PAN validation feature, they were able to identify inaccurate PANs and name discrepancies. They then located any challans that had not yet been devoured and put them to effective use. The software had a simple revision filing system, ' How to' manuals, and dedicated support from CA professionals.
Why Tax – compliance is important for your Startups?
If your startup is compliant, it will inject numerous benefits into your business, such as
- avoid castles over tax during the growth of your startup
- Gain trust and brand loyalty
- Risk management becomes extremely easy
- Building a positive reputation in the market
- Higher productivity in the company
- Reduced legal problems
- Better public relations
- Higher employee retention
- Avoidance of criminal charges
- Increase cash flow
- Because most businesses are already tech-driven, expanding the use of technology to ease tax compliance is a lot easier. Embedding technology within a company's fabric allows it to successfully deal with the different regulatory difficulties that arise as it grows.
- Take, for example, an Indian online grocery firm that used technology to overcome its TDS compliance issues. File its TDS returns each month; the company uses a government-provided application and data exported from its payroll. They were, however, confronted with numerous obstacles along the road.
- They could not determine whether the data inputs were by TDS tax rules. Even though the data entered was correct, they received many warnings for previous periods' TDS refunds. The TDS program was difficult to utilize and was not user-friendly. Among other challenges, they could not perform PAN validations in a scalable and secure manner.
- The online grocery startup turned to a renowned FinTech firm for help with their TDS filing concerns, which they were able to manage in a brief period.
- FinTech platforms provide the best technologies for startups to use when it comes to tax compliance. AI-based tools, one-click reconciliations, built-in data validations, automated alarms to detect discrepancies, intelligent reports, and more are all included in their current solutions. Despite providing more advanced benefits, their solutions are future-ready and cost less than traditional accounting firms and ERP systems.
As a result, if company owners want to secure that elusive investment or even be bought a few years down the road, the solution is straightforward. Now is the time to digitize your tax returns.
Eligible startups are eligible for tax exemptions under the Start-up India Program.
- This plan was open to startups that were formed between April 1, 2016, and March 31, 2021. The eligibility period has been extended until March 31, 2022, as part of Budget 2021. Such startups will be entitled to a tax credit of 100 percent on profits for three years in a row if their annual turnover does not exceed Rs.25 crores in any given financial year. This will assist startups in meeting their working capital needs throughout their early years of operation.
- A new section 54 EE of the Income Tax Act has been added to allow qualifying startups to defer paying tax on long-term capital gains if the gain, or a portion of it, is invested in a fund authorized by the Central Government within six months of the asset transfer date.
- In the long-term defined asset, the maximum amount that can be invested is Rs 50 lakh. For three years, this sum must be put in the designated fund. If money is withdrawn before three years, the exemption is revoked in the year the money is withdrawn.
- Suppose an individual or a HUF sells a residential property and uses the proceeds to purchase 50 percent or more equity shares in a qualified startup. In that case, long-term capital gains tax will be waived as long as the shares are not sold or transferred within 5 years of purchase.
- Startups must also utilize the funds to purchase assets, and assets purchased must not be transferred within five years of the date of purchase.
This exemption will encourage investors to participate in qualifying companies, allowing them to grow and expand.
India's startup scene is exploding. People with unique ideas have been pushed to build a concrete plan for providing in-demand services as a result of the trend. The Indian government has laid out clear regulations to make it easier for entrepreneurs to set up shop in the country. Tax* laws were also developed to nurture and assist entrepreneurs in their growth.
Startups should be aware of government laws, as they are advantageous to them regarding income tax compliance checklist filing in India.
Let's take a closer look at the tax implications and perks accessible to startups.
Individuals and Hindu Undivided Families are excused from paying taxes. Any long-term capital gain from the sale of a residential property that is invested in a startup qualifies for income tax exemption under the legislation if the following conditions are met:
- The capital gain is used to purchase 50% or more of the startup's equity shares.
- The purchased shares are not transferred or sold out within five years of purchase.
- If the startup uses the money to buy an asset, it cannot be transferred for five years after the asset is purchased.
- It is a way to contribute to the expansion and growth of a business.
- Long-Term Capital Gains (LTCG) Exemption: According to the Income Tax Act, long-term capital gain amounts that are utilized to purchase government-notified funds within six months after the transfer of an asset are tax exempt.
- The asset's maximum investment amount is Rs. 50 lakhs. The money can be put into a three-year mutual fund. The tax exemption is terminated if the fund is withdrawn within three years.
- Employee Stock Options (ESOP) taxation for startup employees is being relaxed: There is a tax deduction based on specified terms and conditions if an eligible startup issues ESOP to its employees on or after April 1, 2020.
- These tax breaks, coupled with other incentives, have aided the influx of new business opportunities. The following are some of the more notable provisions:
To register a business, follow these simple steps
- To encourage invention, a simple patent application and tracking process are available.
- External commercial borrowing norms have been relaxed, and access to money through Alternative Investment Funds.
- Employees can be forced to get a life insurance policy with term insurance benefits to secure their families' financial security and receive tax benefits on their earnings.
- Given the market's requirement for tax compliance, it's surprising how poorly the bulk of legacy software businesses service their customers.
- Although such taxes are simple in theory, they are complicated to calculate in practice, particularly in the case of sales tax, which is governed by more than 11,000 different jurisdictions in the United States alone. Because the local tax code changes by up to 25% every year, there is no viable approach for firms to calculate annual remittances based on past years' accounting procedures.
- Sales tax compliance creates sky-high financial planning and analysis costs for huge firms. Still, small businesses are even worse because they can't afford outsourced tax preparation and don't have the expertise to handle this filing.
- Failure to pay the correct amount of sales tax, regardless of the size of the company, can result in harsh penalties and even bankruptcy.
Some key legal considerations and regulations that an entrepreneur should be aware of include:
DETERMINE THE TYPE OF BUSINESS ENTITY TO BE ESTABLISHED
- The first step in launching any business is determining whether it will be incorporated as a sole proprietorship, a private limited company, a public limited company, a partnership, or a limited liability partnership (LLP).
- This business can be approached with a long-term and short-term vision and goals in mind. Advertisement Before forming a business, each must meet its unique legal criteria, laws, regulations, and procedures. To avoid legal misunderstandings and penalties of any kind, it is recommended to seek professional advice when forming any type of corporate entity.
- To operate any business, several sorts of approval are necessary from various authorities in the form of permits and licenses that allow the business to operate. The business would be subject to unfavorable judgments, multiple penalties, and fines from various authorities. These legal documents differ depending on the nature of the business, the industry in which it operates, and the size of the company.
COMPLIANCES BASED ON TAXATION
- There are two types of taxes. Indirect (Income Tax) and direct (Sales Tax) taxes (GST, Excise duty, Customs duty, etc.) In India, taxes are levied based on the nature of the business and its operations. Here are some tax breaks for new businesses to help them develop effectively while they're still young.
COMPLIANCE BASED ON INTELLECTUAL PROPERTY RIGHTS
- The entire goal of the startup program is to strive toward the development, commercialization, and innovation of new processes, services, or products that are fuelled by technology or intellectual property. The first step for any startup is to assess and prioritize the IP Rights that are relevant to its operations. IP Rights can be very important depending on the sort of industry. IP Rights are sometimes the sole asset and secret sauce available with a startup.
- It can be safeguarded by timely registration, engaging in non-disclosure agreements, safeguarding its trade secret, and putting in place procedures as preventative measures. Under the Start-up India initiative, startups can take advantage of the 'Scheme for Start-ups Intellectual Property Protection (SIPP).
EXEMPTION FROM TAXES ON INVESTMENTS THAT ARE WORTH MORE THAN THEIR REASONABLE VALUE
- The government has waived the tax on investments in qualifying startups that exceed their reasonable value. These contributions can come from local angel investors, family, or funds that are not registered as venture capital funds. Incubator investments that exceed reasonable value are also exempt.
After seeing the startup eligibility criteria, tax implications, and rewards, we must follow the rules to maintain a smooth growth pattern. We can earn significant money by climbing greater heights quickly, provided that every part of the beginning business is headed on the right path.
Benefits from the tax code ensure that the government is working to improve the economy's prospects. Learn the provisions in-depth and apply them to save money on taxes in India. You are more likely to succeed when you have a clear path to innovation and moral purpose.
Before beginning any endeavor, it is preferable to have a clear understanding. We provide you with a clear picture of your idea and the challenges that may arise as a result of it, information about your target clients and your objectives, and customized response to your questions. Following the talk, we will provide you with the technology that enables accelerators to create a powerful product.
We help startups by selecting and leveraging cutting-edge technology, whether it's online, mobile, or cloud, for new or existing products and development. After a thorough examination of the technological stack's benefits and drawbacks, our experts choose the optimal framework for your growth.