START UP COMPANY AND TAX BENEFITS AVAILABLE TO START UP

“Start-Up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number 16[G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade]:

G.S.R. 127(E) — This notification is being issued in supersession of the Gazette Notification No. G.S.R. 364(E) dated April 11, 2018 as modified vide Gazette Notification No. G.S.R. 34 (E) dated January 16, 2019.

Definitions

  1. In this notification,-
  • An entity shall be considered as a Startup:
    1. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
    2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
    3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

Explanation

An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.

  • “Act” means the Income-tax Act, 1961;
  • “Board” means the Inter-Ministerial Board of Certification comprising of the following members:
  1. Joint Secretary, Department of Promotion of Industry and Internal Trade, Convener
  2. Representative of Department of Biotechnology, Member
  3. Representative of Department of Science & Technology, Member
  • “CBDT” means Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963);
  • “limited liability partnership” shall have the meaning as assigned to it in clause (n) of subsection(1) of Section 2 of the Limited Liability Partnership Act, 2008;
  • “Partnership firm” means a firm registered under section 59 of the Partnership Act, 1932;
  • “Private limited company” shall have the meaning as assigned to it in clause (68) Section 2 of the Companies Act, 2013;
  • “Turnover” shall have the meaning as assigned to it in clause (91) Section 2 of the Companies Act, 2013;
  • All references to “Forms” in this notification shall be construed as references to the forms set out in Appendix-I hereto;
  • “DPIIT” means Department for Promotion of Industry and Internal Trade.

Recognition

  1. The process of recognition of an eligible entity as startup shall be as under: —
    • A Startup shall make an online application over the mobile app or portal set up by the DPIIT.
    • The application shall be accompanied by—
      • A copy of Certificate of Incorporation or Registration, as the case may be, and
      • A write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.
    • The DPIIT may, after calling for such documents or information and making such enquiries, as it may deem fit, —
      • Recognize the eligible entity as Startup; or
      • Reject the application by providing reasons.

Certification for the purposes of section 80-IAC of the Act

  1. A Startup being a private limited company or limited liability partnership, which fulfills the conditions specified in sub-clause (i) and sub-clause (ii) of the Explanation to section 80-IAC of the Act, may, for obtaining a certificate for the purposes of section 80-IAC of the Act, make an application in Form-1 along with documents specified therein to the Board and the Board may, after calling for such documents or information and making such enquiries, as it may deem fit, —
    • Grant the certificate referred to in sub-clause (c) of clause (ii) of the Explanation to section 80- IAC of the Act; or
    • Reject the application by providing reasons.

Exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Act

  1. A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause, if it fulfills the following conditions:
    • It has been recognized by DPIIT under para 2(iii)(a) or as per any earlier notification on the subject
    • Aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees:

Provided that in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of twenty five crore rupees in respect of shares issued to any of the following persons shall not be included─

  • A non-resident; or
  • A venture capital company or a venture capital fund;

Provided further that considerations received by such a startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the aggregate amount of paid up share capital and share premium of twenty five crore rupees.

  • It has not invested in any of the following assets,─
    • Building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
    • Land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
    • Loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
    • Capital contribution made to any other entity;
    • Shares and securities;
    • A motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
    • Jewelry other than that held by the Startup as stock-in-trade in the ordinary course of business;
    • Any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

Provided the Startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium;

Explanation.─ For the purposes of this paragraph,-

(i)“Specified Company” means a company whose shares are frequently traded within the meaning of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of financial year preceding the year in which shares are issued exceeds one hundred crore rupees or turnover for the financial year preceding the year in which shares are issued exceeds  two hundred
fifty crore rupees.

(ii) The expressions “venture capital company” and “venture capital  fund” shall have the same meanings as                 respectively assigned to them in the explanation to clause (viib) of sub Section( 2) of Section 56 of the Act.

Declaration

  1. A startup fulfilling conditions mentioned in para 4 (i) and para 4 (ii) shall file duly signed declaration in Form 2 to DIPP that it fulfills the conditions mentioned in para 4. On receipt of such declaration, the DPIIT shall forward the same to the CBDT.

Scope

  1. Notification referred in para 4 shall apply irrespective of the dates on which shares are issued by the Start up from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2) (viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification.
  2. Notification referred to in para 4 shall be applicable only in respect of applicability of the provisions of section 56(2)(viib) of the Act to the Startup and shall not grant any exemption in respect of applicability of other provisions of the Act.

Revocation

  1. (1)  In case it is found that any certificate referred to para 3 has been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval.

(2) Where the certificate or approval has been revoked under sub-para (1), such certificate or approval shall be            deemed never to have been issued or granted by the Board.

  1. In case the Startup which has furnished declaration in Form-2 invests in any of the assets specified in para 4(iii) before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.

Key Takeaways

A start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder. At the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential. In this situation the Government appreciates start-ups by giving them deductions in Tax. It reduces the start-ups tax burden at the initial stage of the business.

About the Author: This article is contributed by CA Rajeev GuptaPartner – SIGMAC & Co, Chartered AccountantsLocation- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

For more information and updates, you can contact CA Rajeev Gupta or visit our website https://www.sigmac.co.in/my-blog/.  

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Disclaimer: This content has been prepared for general guidance of the reader on the matters of interest only. It should not be treated as professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information or provisions of the law contained in this article. Author and/ or SIGMAC & Co., Chartered Accountants, its members, employees and agents accept no liability, and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.

Payroll Processing and Outsourcing in India

Payroll Processing and Outsourcing in India

What is Payroll?

Payroll is defined as the process of paying salary to a company’s employees. It starts with preparing a list of employees to be paid and ends with recording those expenses. It’s a tangled process that needs different teams such as payroll, HR and finance to work together. But, businesses can manage all the complexities effortlessly by choosing modern technology and also to manage this process various kinds of software are also available in the market.

The process involves arriving at what is due to the employees after adding in monthly emoluments various items like incentives, bonuses, leave encashment etc. for a particular payroll cycle and adjusting the necessary deductions like leaves, Withholding Tax (TDS) as per Country’s tax regulations, employees’ Social Security contributions like Provident Fund, Insurance, meal coupons etc. It is further adjusted for deduction of any advance given to employees.

A payroll cycle is the time gap between two salary disbursements. Businesses can opt to pay salaries on a daily basis, weekly, bi-weekly, or monthly basis. Generally, it is processed every month worldwide.

Nowadays, many businesses, both big and small, consider outsourcing their payroll processing function to a third party. These third party consultants are generally experts in the field of payroll processing. Outsourcing payroll helps businesses minimize expenses and quantify visible and hidden costs around payroll management. By hiring professionals whose sole responsibility and focus is payroll, you minimize the chances of errors, missed deadlines, omissions, or late payroll tax filings.

Some benefits of Outsourcing Payroll are:

 

1. Time Savings / Productivity

Payroll processing in-house is a time-consuming process. Keeping track of benefit deductions, new hires and terminations, paid time off as well as federal and state regulation changes can be frustrating tasks. Outsourcing payroll allows employers to concentrate on their core business and frees up the business owner, human resources or accounting personnel to work more on strategic tasks that could ultimately affect your bottom line.

2. Reduce Cost

The direct costs of processing payroll can be greatly reduced by working with a payroll provider. Big businesses can afford to maintain robust payroll departments. However, Small/medium sized businesses, having an in-house payroll process is a money burner. If your business has fewer than 500 employees, there’s a very good chance that you can save money by outsourcing your payroll operations. Do the math. Figure out how many labor hours your employees are devoting to payroll-related activities (calculating payroll for each time period, printing, signing, and distributing paychecks, computer software and program maintenance, training and support, keeping up with changes in tax rates/laws, preparing and remitting payroll taxes and returns to government agencies, new hire reporting, generating reports for in-house and accountant use). Calculate how much you’re spending and compare the amount to the plans offered by several payroll services providers. 

3. Avoid Penalties & Mistakes

Government rules and regulations are always changing and business owners can’t be expected to stay on top of these changes. Professional payroll providers, on the other hand, must stay current with rules, regulations and changes in tax rates. A good payroll services provider is far less likely to make a serious error than your in-house staff.  Many outsourced payroll providers calculate payroll taxes, and manage filings and payments so long as you provide the necessary information and funds on time.

4. Team of Experts

Most business owners and payroll-related staff don’t have time to research and study constantly changing regulations, withholding rates, and government forms. By outsourcing payroll, a small business can take advantage of expertise that was previously available only to big companies.  The most valuable payroll companies have a team of experts who handle many areas of Human Resources and Payroll.

5. Enhanced Security

Payroll processing is a complex and potentially risky business operation. Most payroll services have technologies that can spot and alert clients to various types of payroll fraud. Additionally, online payroll solutions offer a “safe haven” for your confidential payroll data. In addition to redundant backup and multiple server locations, a quality payroll provider invests in state-of-the-art systems for storing and protecting data, simply because it’s part of the service provided to clients.

6. Employee Access / Gaining a Human Resource Information system (HRIS System)

Human Resource Information Systems (HRIS) have become one of the most important tools for many businesses. Even a small, 20-person office needs to realize the benefits of using HRIS to be more efficient. Many firms do not realize how much time and money they are wasting on manual human resource management tasks until they sit down and inventory their time.  It allows companies to cut costs and offer more information to employees in a faster and more efficient way. Below are some examples of how employers and employees gain access to HR Information:

Employers Gain the ability to:

  • View Invoices and Payroll Reports
  • Access and Update Employee Information
  • Enter New Employees
  • Enter Time Reporting Information
  • Offer Benefit Open Enrollment
  • Communicate with Employees
  • Track PTO ( Paid Time Off)
  • Upload Benefits Plans and Custom Benefits Documents
  • Upload Employee Handbooks and other HR PDF
  • Track Licenses / Certifications for Employees
  • Performance Reviews
  • Training Records
  • Total Compensation Reports

Employees gain access to:

  • Payslips
  • Tax Information
  • Expenses claim
  • Review Checks
  • Review Benefit Information
  • Update Information
  • Any Corporate Documents
  • Online Benefits Enrollment

7. Avoid Technology Advancement costs

A constant question for small business owners is whether they have the latest version of their payroll software and the most recent tax tables installed on their computer. Using the wrong tax tables can result in stiff penalties. Paying a maintenance fee and having to upgrade software is a fixed cost ongoing.  Outsourcing payroll removes those costs/headaches and keeps payroll running smoothly.

8. Losing Payroll Expertise 

Multi-tasking payroll responsibilities with an overworked office manager or accounting employee,  depending on a inexperienced subordinate to run payroll. Whatever the situation, every business with in-house payroll runs the risk of receiving notice that your payroll person is taking an extended vacation, FMLA, fell ill, took another job or is not able to do payroll.   If your bookkeeper or controller gets a new job, they will walk out the door with their knowledge of the payroll process and how you do it. Outsourcing your payroll will assure retaining the knowledge of all the ins and outs of payroll-related tax laws and regulatory mandates on the federal, state and local levels.

9. Offer  Direct Deposit

Providing direct deposit to employees is difficult if a company doesn’t use an outside payroll service. Increasingly, small businesses recognize that employees want direct deposit. Not having to make a trip to the bank is an important convenience for them. More importantly for business owners, direct deposit eliminates time-consuming and error-prone paper handling and the need to reconcile individual payroll checks every month. Using direct deposit reduces the risk of fraud by eliminating the use of paper checks that could be altered or counterfeited. Unlike a paper check that bears your account number for all to see, when you use direct deposit your account number remains confidential to your financial institution or payroll provider. Confidentiality is another benefit of outsourcing payroll.

10. Peace of Mind

With the help of a professional payroll service provider, the hassle and pain often associated with processing payroll is gone.  You provide the basic information, and your payroll company takes care of the rest. And with guarantees of error-free payroll and tax filings and payments, you can eliminate the worry that many experience when it comes to paying employees and taxes correctly and on time.

 11. Key Takeaways

In Conclusion, when you encounter a business owner or manager who can identify with 1 or more of these 10 factors that prevent productivity and hinder profitability centered around the time and cost associated with administering your own payroll, one can usually find a business case to make the switch for outsourcing payroll.  These are the key benefits of outsourcing payroll. Assuming the payroll provider does a quality job and serves the client, these outsourcing relationships become long-standing business partnerships. Outsourcing of the Payroll process also makes the owner of the business tension-free about any breach of law regarding payroll laws and error-free and hassle-free payroll is processed.

About the Author: This article is contributed by CA Rajeev Gupta, Partner – SIGMAC & Co, Chartered Accountants,  Location- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

Disclaimer: This content has been prepared for the general guidance of the reader on matters of interest only. It should not be treated as professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information or provisions of the law contained in this article. Author and/ or SIGMAC & Co., Chartered Accountants, its members, employees and agents accept no liability and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.