The last year has changed how the world order works. But, as they say, “Chaos is a ladder”. With the upheaval, a lot of opportunities came in. We saw the rise of innovative business models, many startups refreshed their models, the compliance environment underwent a huge change, a flurry of laws continue to come in, global barriers diminished. Opportunity and risk are two faces of the same coin. In this volatile compliance regime, to be successful, the founders must be prepared for an accelerated, and ongoing planning process.
The first importance of tax planning lies in how an entity is structured.
For global new-age businesses, it is very important to decide where it is domiciled/to be domiciled. Most startups today have multiple business centers in global markets or are planning to do so. Structuring of the entity, keeping in mind the tax and FEMA/RBI laws relating to related party transactions, cross-border transactions, avoiding double taxation, availing beneficial tax rates and various such facets are extremely important. Failure to abide by these or setting up a faulty system may have detrimental consequences like insurmountable penalties, revenue leakage, inaccessibility to funding and sometimes even shutting down of the startup.
The next benefit would be managing/maintaining positive cash flows.
Cash is king for any business. Unfortunately, startup founders often fail to plan their transactions and taxes. There are a number of ways to plan your transactions to manage taxes better. Incorrect planning of accounting transactions not only results in an outflow of more taxes but also may result in cash accounts getting wiped out by the time tax bills come due. An ideal tax plan will preempt future tax provisions, strategize cash reserves so that can be set aside to pay taxes on time.
Avoiding penalties and litigation.
The global tax laws are layered and there are multiple facets that need to be taken into consideration. Tax planning is necessary since it is the first line of defense against litigation claims that are related to tax. The tax planning methodology will help you streamline your current tax situation and keep everything aligned to taxation laws. This in turn, helps increase the compliance rating of the startup.
It is an obvious fact that a tax-compliant, healthy startup is always preferable to global investors. Apart from that, the latent benefits of tax planning lie in the structuring of investments. Indian laws have been heavily criticized for their complicated and sometimes draconian provisions. Resultantly, global investors have come to prefer other geographies like Singapore, Hong Kong, etc. for their investments. An effective tax planning can help startups to take that call – whether to shift their base (considering benefits from funding vis-à-vis economies of operation), if yes, then where to shift, etc. On the other hand, Indian laws also have latent exemptions like that of Angel Tax ones. An effective tax plan also facilitates the availing of such exemptions.
Structuring related party transactions.
Transactions that a startup has with its directors, shareholders, group companies, relatives of directors, etc, may come into the ambit of related party transactions. For eg: Mr. A is a shareholder of Company B, holding 22% of its shares. The company has accumulated profits of Rs.37 lakhs as of 31st March 2019 and it granted a loan of Rs.150,000 to A, by way of an account payee cheque. He repaid the amount on 4th May 2019. In this case, even if the loan has been repaid by A, the loan amount granted to the extent of accumulated profits is treated as deemed dividend. This, in turn, will have its own tax consequences. An effective tax planning helps avoid such loops, optimize and structure transactions better.
Apart from these, the day-to-day benefits would be avoiding penalties, disqualification of directors due to non-compliance, reducing cash outflow, etc.
To conclude, global Startups, especially those engaged in borderless Internet and e-commerce transactions, outsourcing development of an intellectual property, etc, must deal with issues of tax jurisdiction. Navigating through this labyrinth of complicated laws effectively requires that an international tax practitioner be a member of the advisory team.
For any query, support or feedback, reach us at India Tax and Legal Compliances or WA us at +91-9230033070 or Call us at 1800-102-7550
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