Blog Article

For any company set up in India, the entity must adhere to certain legal and tax compliances. With Government initiatives such as Startup India, Digital India and Skill India being the drive force behind several companies and startups being registered in India. In Spite of these initiatives, India still ranks poorly (135th out of 190 countries) on the Ease of Doing Business Index. This means that a company should meet several regulatory standards and compliances such as PAN, TAN, Service Tax, IEC, ESI, VAT, etc. that are all essential for a company willing to conduct  business in India.

Software Companies are companies that deal with the maintenance, development and/or publication of software that are either cloud based (SaaS, PaaS, IaaS, AaaS, MaaS, etc.) or maintenance/license (on premise) based. Microsoft, Cisco, IBM, HUL, SAP, salesforce.com, etc. are some of the biggest software companies in the industry.

List Of Compliances

The Directors of a company are responsible for the compliance of a company. The process of compliance is a continuous affair and not just a one-time process. The following is a list of compliances that a software company in India requires:

Registration

Under the Companies Act, 2013 a company is required to be registered to conduct business in India. Software companies operate online and thus will have to be registered to be able to sell any software (good or service). In order to be incorporated, a company should complete all legal formalities such as filing AOA, MOA, list of directors, company name, etc.with the Registrar of Companies. After a company receives a letter of incorporation, it is identified as a separate legal entity by the law.

Compulsory Company Compliances

• A company needs to hold its first board meeting to discuss important issues within 30 days from the date of incorporation. A director should issue a notice with the agenda of the meeting at least 7 days before the date of the meeting. The minutes of the meeting should be recorded signed and maintained in a minutes binder which is a permanent document.
• A name board with the name of the company, Company Identification Number, company email ID and phone number, etc. should be put on display outside the Registered Office of the company. The same details should also be displayed on all letter heads, business letters, official publications, etc.  
• A member register and a share allotment register need to be maintained with the company in the prescribed format.
• Each year, a company is required to file with the Registrar of Companies the following statements: profit and loss account, annual return, balance sheet and auditor’s report before the stipulated due date.
• Appointment or removal of directors, change in registered office, etc. need to be intimated or reported to the ROC (as prescribed from time to time by the ROR).
• Corporate Social Responsibility (CSR) is a compulsion for companies that qualify for the CSR criteria. Such companies have to undertake activities that contribute towards social benefit (philanthropic) during a financial year.

Permanent Account Number (PAN)

After Incorporation a company is required to file for a Permanent Account Number which is a ten digit alphanumeric number issued by the Income Tax Department. The purpose of a PAN card is so that the Income Tax Department can track financial transactions and Income Tax payment and returns. PAN can be filed by downloading form 49A on the Government’s website UTSIL or NDSL. The documents required to file for PAN are address proof (of the registered office) and identity proof (partnership deed, trust deed, registration certificate). Companies without a PAN will have tax deducted at the highest possible rate.

Tax Deduction And Collection Account Number (TAN)

TAN is a ten digit alphanumeric number required by companies that collect or deduct tax at the source issued by the Commercial Tax Department of a particular State. TAN number has to be quoted by downloading form 49B on the National Securities Depository Limited (NSDL) website or the Tax information Network Facilitation Center (TIN-FC) for any tax deducted at source (TDS) or tax collected at source (TCS) returns on behalf of the Income Tax Department. Proof of address and identity are required to be submitted along with the application.

Service Tax (ST)

Service Tax is imposed by the Central Government on services provided (except services in the negative list) considering the Place of Provisions of Service Rules, 2012 and Point of Taxation Rules, 2011. Tax The Service Provider collects indirect tax from the customer on behalf of the Government and makes a payment to the GOI. Form ST-1 is used to applying for Service Tax. A copy of the PAN, proof of address and constituents of the applicant are required to be submitted along with the application form.

The current rate for Service Tax is 15% (which includes Swachh Bharat Cess and Krishi Kalyan Cess). If any partnership or entity makes more than 10 lakhs in a single financial year, then he has to compulsorily pay Service Tax. If the entity does not make more than 10 lakh, then Service Tax registration is optional. Input Service Providers and any entity liable to pay service tax under Reverse Charge are also required to charge/pay Service Tax.

Value Added Tax (VAT)

Is a tax imposed on goods sold within a State by the State Government and each State has a different VAT rate. VAT is applicable for sale and purchase of tangible goods (only) within the same State. This implies the buyer and seller should be in the same State at the time of the transaction. VAT is compulsory for businesses with turnover exceeding INR 5-10 lakhs. Post registration, the entity is allocated a 11 digit Taxpayer Identification Number (TIN). Value Added Tax is going to be replaced by the Goods and Service Tax (GST)  which is a uniform tax. Do check our article on how to enrol for GST in India.

Central Sales Tax (CST)

Central Sales Tax is imposed when goods are sold in different States within India by the Central Government. CST is a uniform rate. This implies that the seller and buyer are in different States. Registration for CST becomes compulsory when an entity starts selling in other States or makes inter-state sales.

Professional Tax (PT)

Any individual practicing a profession (doctors, architects, lawyers, accountants, etc.) will be required to pay Professional Tax to the respective State Governments. Not all States require professional tax to be paid, but it is compulsory for employees to pay professional tax (not more than INR 2500/year) employed in States that do impose a professional tax. The tax is deducted by the employer and is sent to the Municipal Corporation. PT has to be registered within 30 days of employing company staff. Offices at multiple locations will require multiple PT registrations with respective State Governments under that jurisdiction.

Importer Exporter Code (IEC)

Any entity or individual that intends to import or export goods and/or services from India requires to register for Importer Exporter Code (ANF 2A) issued by the Directorate General of Foreign Trade (DGFT), Ministry of Commerce and Industry. PAN is a necessary document required when filing for IEC. IE code (issued within 10-15 days) is required for companies to enable them to send money abroad and also clear customs. Once IE code has been filed, there is no need for renewal and is valid throughout the lifetime of a company, and thus most entities file for IEC whether the company may need it or not.

Employee State Insurance (ESI)

Employee State Insurance is a scheme for Indian workers being employed in India. The fund is managed by the Employees State Insurance Corporation (ESIC) according to the ESI Act, 1948. The ESI scheme is a social security scheme that provides medical and cash benefit to any employee earning less than INR 21,000/month. The Employer contributes 4.75% and the employee contributes 1.75% towards ESI.

This Act is applicable to:

• Non-seasonal factories that employ 10 or more people.
• Restaurants, hotels, shops, newspaper establishments, theaters, etc. that employ 20 or more people.
• Private Educational and Medical institutions that employ 20 or more people in certain States.
• The wage limit this Act is applicable to is on Incomes of INR 21000 or less per month.

Employee Provident Fund (EPF)

Employee Provident Fund was set up by the Ministry of Labour and Employment under the  Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and is Governed by the Employee Provident Fund Organization (EPFO). The main functions of the Act are to assist the public with respect to work, unemployment, marriage, illness, higher education, death, etc. (some of these criteria permit partial withdrawals). The ceiling for contributions under this scheme is INR 15000/month.

This Act is applicable to:

• Factories that employ 10 or more people.
• Any firm that employs 20 or more people.
• Incomes of individuals below INR 15000.
• Other schemes launched by EPFO are the Employees Pension Scheme, 1995 (EPS) and Employees Deposit Linked Insurance Scheme, 1976 (EDLS).