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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
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SSI vs MSME Choosing your vehicle Companies Taxation Other Legal aspects

Axia Advisory Services Pvt Ltd

SSI vs MSME
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‡ SSI Small Scale Industries ‡ MSME Micro, Small and Medium Enterprises
± Certification / Registration Type Micro Small Medium Service Equipment Value < Rs10 lakhs < Rs2 crores < Rs5 crores Manufacturing P&M Value < Rs5 lakhs < Rs5 crores <Rs10 crores

Axia Advisory Services Pvt Ltd

Entity Choice
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‡ Service area or product development ‡ No of people partners, employees, etc ‡ Time to test your service / prototype your product

Axia Advisory Services Pvt Ltd

Formation
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Proprietor Incorporation Documentation Min Capital Flexibility None Least Very High

Partnership Agreement / Deed Minimal Unlimited High Partial Restriction Medium 30.9% NA

LLP Incorporation Agreement Rs500 Limited Medium Partial Restriction Medium 30.9% MAT 19.055%

Company MoA / AoA Rs1 lakh Limited Medium - Low* Partial Restriction High 30.9% / 32.445%# MAT 19.055% / 20.01%#

Personal Liability Unlimited Remuneration to Fully Flexible owners Record Maintenance Eff Tax Rates MAT Eff MAT Rate Low Slab NA

* High degree of legal compliance / formalities # surcharge applicable if revenues > Rs1 crore Axia Advisory Services Pvt Ltd

In all forms of entity
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‡ 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
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‡ 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)
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‡ 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)
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‡ Exemptions from audit available
± Turnover ± Contribution ± But needs to be certified by designated partners

‡ Maximum Remuneration*
± Profit Rs3 lakhs ± Profit > Rs3 lakhs Rs1.5 lakhs/90% of profit 60% of incremental profit

* same as a traditional partnership firm Axia Advisory Services Pvt Ltd

Private Limited Company
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‡ All Directors need DIN ‡ Other mandatory provisions:
± Quarterly board meetings ± Intimation to Registrar of Companies ± Audit

‡ More Legal Requirements

Axia Advisory Services Pvt Ltd

Annual Filing ± RoC
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Balance Sheet Profit and Loss Statement Annual Return Compliance Certificate
± If capital between Rs10 lakhs and Rs2 crore

Axia Advisory Services Pvt Ltd

Other Filings ± RoC
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Mortgage Cost Audit Report, if applicable Increase in Authorised / Paid Up Capital Change in Directors, if any

Axia Advisory Services Pvt Ltd

Companies Act
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‡ 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

Axia Advisory Services Pvt Ltd

Companies Act
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‡ 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

Axia Advisory Services Pvt Ltd

Companies Act
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‡ Can issue DVR shares
± Cool off period 3 profitable years

‡ Specific format of P&L / Balance Sheet

Axia Advisory Services Pvt Ltd

Companies Act ± No Worry On
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Audit Committee Directors rotation / retirement Ceiling on managerial remuneration Time-limit for managing director

Axia Advisory Services Pvt Ltd

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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

Axia Advisory Services Pvt Ltd

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Income Tax ± Due Dates
‡ Advance Tax payments
± Calculated on the estimated profit for the year
‡ ‡ ‡ ‡ 15th June 15th Sept 15th Dec 15th Mar 15% 45% 75% 100% --30% 60% 100%

‡ Annual Returns to be filed
± Audited / Partner of such firm ± All others ± Ensure loss returns are filed in time
Axia Advisory Services Pvt Ltd

31st Oct 31st July

Income Tax - Requirements
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‡ 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 Axia Advisory Services Pvt Ltd

Income Tax ± Expenses Claim
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‡ 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
Axia Advisory Services Pvt Ltd

Income Tax ± Expenses Claim
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‡ 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

Axia Advisory Services Pvt Ltd

Income Tax ±Salary Payments
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‡ 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

Axia Advisory Services Pvt Ltd

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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
Axia Advisory Services Pvt Ltd

Income Tax ± TDS
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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

Axia Advisory Services Pvt Ltd

Income Tax ± TDS
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Head Salary

Exempt Upto When Min Slab Payment

Deposit Cert Due Due 7th of next month 7th of next month Form 16 on / before 31 May Form 16A, 31 Jul, 31 Oct, 31 Jan, 31 May

Interest Contractor

Rs5,000 p.a. Rs30,000 / contract OR Rs75,000 p.a. Rs10,000 p.a. Rs30,000 p.a.

Payment / Credit

Commission Professional

Axia Advisory Services Pvt Ltd

Service Tax
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‡ 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%
Axia Advisory Services Pvt Ltd

Service Tax Procedure
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‡ 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
Axia Advisory Services Pvt Ltd

Service Tax
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‡ Payment
± 5/6th of quarter end (ex Mar) ± 5/6th of month (ex Mar) Individual / Firms Others

‡ Returns: Half Yearly 25th Oct / 25th Apr ‡ ST applicable on full bill value
± Including TDS deducted

Axia Advisory Services Pvt Ltd

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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

Axia Advisory Services Pvt Ltd

RBI / FEMA
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‡ RBI Regulations / FEMA
± Imports: ± Exports: Equipment Software / Services

Axia Advisory Services Pvt Ltd

Provident Fund (PF)
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‡ Mandatory if
± 20 employees and ± Salary Rs6,500/month

‡ Exceptions
± Company PF Trust ± excluded employee

‡ Deductions
± 12% of Basic + DA ± Matching contribution by employers

Axia Advisory Services Pvt Ltd

Shops & Establishments Act
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‡ Mandatory in all cases (except if it is a factory) ‡ Fees depends on number of employees

Axia Advisory Services Pvt Ltd

ESIC
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‡ Mandatory if
± Manufacturing using power 10 employees ± Others 20 employees ± Salary Rs15,000 / month

Axia Advisory Services Pvt Ltd

Professional Tax
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‡ State subject
± Maharashtra, Karnataka, West Bengal, Andhra Pradesh, Gujarat, Tamil Nadu, Madhya Pradesh

In Maharashtra ‡ Mandatory in all cases ‡ Amount depends on Salary

Axia Advisory Services Pvt Ltd

Things to Remember
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‡ 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

Axia Advisory Services Pvt Ltd

Private Company Sweat Equity
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‡ 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
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

Axia Advisory Services Pvt Ltd

Normal Procedure (1/2)
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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
Axia Advisory Services Pvt Ltd

Normal Procedure (2/2)
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‡ 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

Axia Advisory Services Pvt Ltd

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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
Axia Advisory Services Pvt Ltd

Private Company Sweat Equity
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‡ 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

Axia Advisory Services Pvt Ltd

Private Company Sweat Equity
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‡ 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

Axia Advisory Services Pvt Ltd