Query 1 – “Mine is a startup company. There has been no business during the year. I just need to file NIL returns. There is no need of other compliances.”
Query 2 – “I have a startup. I have not even opened a bank account. So, I do not need to file anything”
These are two of the topmost queries that we receive during every compliance season. We help in the filing of close to 2000 annual returns every year. One thing that never changes is the type of the queries mentioned above.
Two instances. Yet, one common myth – No need to fulfill the compliances since there is no business transactions. One common outcome – Non-compliance with laws of the land.
At the beginning, let us mention and re-iterate that there is nothing called a “no business allowance” or “NIL return filing”. The general law still now has no exemption that allows businesses with no revenue to skip compliances. Some exceptions are provided now to the businesses registered under the “Startup India” Scheme. That is a topic for our upcoming discussion this week.
The reason that we thought of bringing this piece to light can be attributed to the alarmingly high rate of non-compliance in India.
STATUS OF NON-COMPLIANCE IN INDIA
The non-compliance level in the business sector and especially among startups is alarming. Our survey has confirmed that:
- Every 2nd Startup gets Income Tax Notice for tax demands or for non-compliance
- 3 out of 7 Startups finds place on the defaulter list of Registrar of Companies due to non-compliance
- 2 out of 4 Startups incur unnecessary pay-out by way of interests and penalties.
- 7 out of 10 startups shut down their business within first 3 years of their operations
CONSEQUENCES OF NON-COMPLIANCE
Non-compliance with the laws of the land can have multi-faceted consequences, ranging from penalties, additional fines to prosecution. Following are some of the brief consequences to give a general idea:
i) Roadblock in Funding –
This point deserves the status of Consequence No. 1. Most startups aspire to get funded, now or in future. That is the truth of the day. The pre-requisite of any funding exercise is the status of tax and regulatory compliances. Never has a company got funded, even in the seed investment level, whose compliances are not upto date. Non-compliant startups do not even live through the term sheet stage. Further, there is a severe negative marking for compliances done post due date with additional fees.
ii) Roadblock in availability of Bank loan–
External angel/venture funding being out of question, next source of funding for any business is bank loan. However, even banks require compliance documents like audited financials, auditor’s report, auditor’s certificate for the last 3 years or as the case may be. Chances of a non-compliant company availing bank loans are next to zero per cent.
iii) Roadblock in availability of Govt Tenders-
Same principle applies to Govt tenders. The pre-requisite of any such tender is a compliant business environment, where all reporting is upto date.
iv) Stamp of a “Dormant” Company-
Companies with a non-filing history of 3 years or more are often categorized by the Ministry as ‘dormant’ companies. These companies can never be eligible for any sort of Govt/institutional assistances/contracts. Apart from that, these companies are vulnerable to RoC demand notices technically at any time.
v) Liability of Directors-
Now, one may think that simply closing down the inactive company or starting up a totally new company would solve the problem. However, that is not so. A director of a company which has not filed its returns for 3 consecutive years is disqualified to become a director in any other company as per the Companies Act, 2013. In other words, his DIN gets blocked and he would not be able to start a new company.
a) Penalty for Non- Preparation of Financial Statements –
It is punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 500,000 or both.
Not filing the ITR of your company on time can lead to a penalty, but there are also other consequences and inconveniences attached to the delay. Following are the consequences:
- Penalty for Late Filing u/s 234F – Penalty upto Rs.10,000 on non-filing of your Return (minimum Rs.5,000).
- Payment of Interest – interest u/s 234A @ 1% per month or part month.
- Carry Forward of Losses – Not Allowed in case of non-filing of ITR within due date.
- No chance of Revision of ITR in case of delayed filing
- No chance of belated filing post assessment year end
- No way of claiming TDS credit if ITR not filed
Additional fees @ Rs. 100 per day per form shall be applicable. Apart from this, provisions for disqualification of directors, striking off the company and prosecution are also present.
WHAT ARE THE BASIC MANDATORY COMPLIANCES FOR ANY COMPANY?
The most common reason for such non-compliance that we found in our survey is lack of awareness. Businesses are most vulnerable in the first two-three years of their business. In these years, the businesses do not generate revenue and there are hardly any expenses. This leads to a wrong belief that since there has not been much activity, there is reporting to be done. The reality, however, is far from this.
Irrespective of the whether there is any revenue or even there is any transaction, a company must fulfil the following mandatory compliances:
- Preparation of Financial Statements (Balance Sheet, Profit & Loss Statement, All ledgers, Depreciation Schedule, Trial Balance)
2. Income Tax Return Filing – ITR 6
3.Annual RoC Filing – AOC 4, MGT 7, ADT 1 (as the case maybe)
4. Audit Compliances
5. Secretarial Drafting- Director’s Responsibility Statement, Audit Report, Director’s Report, Internal Financial Controls Report
A CASE STUDY
This case study is simply an example to highlight the general status of non-compliance and it’s causes. We are keeping the name of the company undisclosed due to confidentiality concerns.
Just recently we came across a Company who sought our assistance in completion of its annual compliances since the date of its incorporation, where the date of incorporation dates back to the year of 2007. The company had not filed its annual returns with the ROC in the form of the Annual Return, Balance Sheet and Profit & Loss Account. By not doing the same, the Company has attracted a herculean Penalty of round about Rs. 80000-90000 till date. All for the compliances which could have been completed in Rs. 900 per year, if done timely.
The company in question somehow paid the same. But exactly how many of the start-ups can afford that? The excitement of starting up a business is sky high. Imagine the shock and depression of closing it down. That too just because you had failed to maintain the business in safe harbor compliance.
The thing about non-compliance is you never escape it. Today or tomorrow or day after tomorrow- there is NO WAY AHEAD without complying with them. Even if you decide to close your company after one year, you first need to meet the compliances. If you wish to revive your company, you need to bring it in compliance harbor first. Hence, the sooner you step into the safe compliance harbor, the better it is.
For any query, support or feedback, reach us at India Tax & Legal Compliance or Call/WA us at +91-9230033070 for any support/query/feedback.
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