Tax-saving strategies for startups

Money saved is money earned, and no one knows and understands that as well as someone who runs a startup. Starting up a business is never easy. An entrepreneur has so many numbers to keep a tab on, the most important one of them being the startup’s profitability.

Of course, the kind of profits that a startup manages to generate is highly dependant on the product or service they offer. But one way for a startup to increase profitability is by saving on the income taxes they pay. Here are some strategies that startups can use to save taxes.

Follow tax compliances

A major area where startups lose out on money is by paying penalties for not being tax compliant. This involves not only income tax, but other taxes like service tax, value added tax (VAT), professional tax, etc as well. In income tax itself, a startup can end up paying interest of 100% to 300% on the tax payable in case of late payments.

TDS: A startup has to deduct TDS on the salaries it pays to its employees and other non-salary payments it makes. The startup has to file their TDS returns and duly deposit the deducted tax to the tax department within the time limit provided. Not doing so can attract penal interest, penalties and sometimes, even prosecution. The penal interest is 1% per month on the tax liability, which comprises tax payable, filing fees as well as late filing fees.

Service tax: As far as service tax is concerned, if applicable to the startup, it also has to be charged and submitted in a timely manner. The government charges interest on late payment of service tax and a penalty as well, which can be at least Rs 5,000. The interest is on late payment of service tax is charged as under:

Up to 6 months 18%
6 to 12 months 24%
12 months and more 36%

A startup has to register for service tax if their transactions go over Rs 9 lakh in a financial year.

VAT: While service tax applies to the sale of services, VAT applies to the sale of goods. A startup has to figure out which tax applies to them. A lot of startups make the mistake of unnecessarily registering for VAT even though it is not applicable to them. This happens in the case of most startups because they require a document to open a current bank account and they register for VAT, even though they don’t have goods to sell. Most startups are service providers and would not require VAT registration. A startup should properly understand the nature of their business and consult a CA. Unnecessary VAT registration can lead to a notice and hassles to wind up the registration.

Professional tax: The other tax that startups have to be aware of is professional tax. This tax applies on payments made to contractual employees. But do check the validity of professional tax in your state. It is not applicable in all Indian states.

PF Act: Apart from all of these tax compliances, a startup also has to follow the Provident Fund Act that mandates any company with more than 20 employees to deduct PF from their salaries and contribute the same amount to their PF accounts as well. Not following this compliance can also lead to penalties.

Claim tax-deductible expenses

Incorporation expenses: At the time of filing their income tax returns, a startup can claim the preliminary expenses that were incurred during the company’s incorporation.

Some examples of these expenses are:

  • Incorporation fees
  • Drafting fees for Memorandum of Association
  • Drafting fees for Articles of Association
  • Legal fees
  • Chartered account fees

Business expenses: A startup can also claim deduction on expenses that are incurred for running the business.

Some examples of these expenses are:

  • Depreciation of assets like computers and other electronic equipment
  • Rent paid for office space
  • Meal and entertainment expenses for client meetings
  • Telephone and internet expenses for official use

This is how a startup can follow some basic taxation guidelines and save on taxes. These points might seem to very obvious things that every startup would be doing. But unfortunately, a lot of entrepreneurs are unaware of some of these aspects and they end up spending money where they shouldn’t. A little due diligence on taxes always pays.

This article was published on Your Story on 5 August 2016.

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