Tax Compliances must for all businesses – Profit making or no profit making

Ravi, founder and CEO of a private limited is confused of the fact whether his company is required to file taxes and also comply with statutory compliance since the company has not generated any revenue during the financial year. The Company was incorporated on 12/12/2012 and is engaged in development of software applications. Ravi, incurs expenses as staffing cost, power, electricity and rent from his personal source.

Ravi should know that it is more important for businesses to be in compliance with tax and regulatory requirements even if there is no profit or the company is incurring losses during a financial year.

What does the law says

There is a common myth that paying taxes and complying with tax and regulatory compliance is similar. So when the company is not making any profits, it is not liable to pay taxes and thus complying with the Tax and Regulatory Compliances is also not required. This often leads to tax notices and penal provisions as applicable for non compliance. As in the above case study we note that the company is only incurring expenses during the FY 12-13. When losses are incurred taxes are not required to be paid. Also, these losses can be carried forwarded next years to set off against the profits made in future.

The company has to comply with compliances in order to get the benefits of carrying forward the expenses and save taxes on profits earned in coming years. Let us elaborate the need for each compliance and the penal provisions as may be applicable.

TDS Compliance

Depending on the nature and quantum of expenses incurred, every company is required to deduct taxes at the time of payment or credit to the books of accounts. The taxes deducted need to be deposited to the credit of the government before the 7^th day of the next month, however for the month of March, the same needs to be deposited before 30th April of the proceeding year. The company is also required to file TDS Return every quarter within the 15^th of the beginning month of next quarter, however for the 4^th quarter it can be deposited by 15th May of the proceeding year.

In case of Ravi, since the Company is making payment to staff as salary, office Rent, it is required to deduct TDS u/s 192 in case of payment made as salary depending on the taxable income of the employee during the financial year. TDS u/s 194-I @10% has to be deducted for making payment of rent exceeding Rs. 1.8 Lakhs during the year.

If the company fails to comply with the provisions of TDS, it cannot claim such expenses and will be treated as non-admissible expense. Further, if the company fails to deduct taxes or fails to make payment of the taxes to the government then penalty of up to 100% on amount of TDS may be applicable. If it further defaults in filing of the TDS Return, Rs. 100/day of default (not exceeding the amount of TDS) would be charged.

Preparation of Books of Accounts

As per the Indian Companies Act, 1956 every company is required to maintain its Financial Statements in Revised Schedule VI format. Financial Statements includes Balance Sheet, Profit and Loss Account, Schedules and Annexure, Cash Book (optional).

If the company does not comply with the provision of section 166 then us 168 of the Indian Companies Act, 1956 penalty up to Rs. 50000 may be applicable to the company and every officer in charge of the company. In case of continuing default a penalty of Rs. 2500 per day may be applicable.

Income Tax return Filing

Filing of Income Tax return is mandatory for companies irrespective of profit or loss made during the financial year. Once the Financial Statements of the company is prepared, IT returns should be prepared and filed online with the income tax department website. If profits are made taxes @30% would be applicable. In our case study we note that the company has not made any revenue. Thus the company has to file its Income tax return declaring the losses incurred. The due date for filing the return is 30^th of September and the company can only carry forward its losses if it is filed within the due date. These losses can be set off against future profits to save taxes. If the company fails to file its IT Return within the Due date i.e. 30^th of September, penalty can be levied up to Rs. 5,000 for non-filing of tax return us 271F.

Holding AGM

A newly incorporated Company is required to hold its First Annual General Meeting within a period of not more than eighteen months from the date of its incorporation and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year, subject to the condition that the Company must comply with the provisions of Section 210 of the Companies Act 1956. For any other company not being a new company, it has to hold its AGM within 30^th September of the end of the financial year.

Ravi’s Company is in the first year of its incorporation and thus it should hold its First AGM before 12/08/2014. It is not required to hold any subsequent AGM for the FY 13-14 if the First AGM is held within 12/08/2014.

If the company does not comply with the provision of section 166 then us 168 of the Indian Companies Act, 1956 penalty up to Rs. 50000 may be applicable to the company and every officer in charge of the company. In case of continuing default a penalty of Rs. 2500 per day may be applicable.

Statutory Audit

Statutory Audit of the books of accounts is required to be done in order to show true and fairness of the Financial Statements as prescribed by the Companies Act, 1956. An Auditor has to be appointed who would be performing Statutory Audit for the company and auditing the Financial Statements to state true and fairness of the Financial Statements.

The Company has to comply with this provision as penalty of up to Rs.5000 may be applicable to every director or officer in charge of the company as prescribed u/s 165 of the Companies Act, 1956.

ROC Compliance

Once the Financial Statements are prepared and audited, ROC Compliances are required to be done in order to notify the same with the Registrar of Companies (ROC). A private limited company is required to file Form 23AC (Balance Sheet), Form 23ACA (Profit and Loss Statement) and Form 20B (Annual Return) online with the ROC within 60days of holding its AGM. If it fails to file these aforesaid forms, it can attract penalty up to Rs 5000 per form.

To Conclude

Founders of Startups should look to have a plan to handle day to day accounting and taxation compliances, even though at the start, they may find it difficult to focus on issues related to accounting and taxation as they have other critical front office issues to handle as well.

Tax Compliances must for all businesses – Profit making or no profit making