Small companies play a crucial role in the growth of an economy and contribute significantly to employment. The government's commitment to reducing compliance burden on small companies is a step towards creating a more conducive business environment for such enterprises.
MCA has been taking various measures to promote ease of doing business and ease of living for corporates. The recent measures include decriminalization of various provisions of the Companies Act, 2013, and the LLP Act, 2008, extending fast track mergers to startups, and incentivizing the incorporation of One Person Companies (OPCs).
One of the significant changes made by the MCA is the revision of the definition of "small companies" under the Companies Act, 2013-
Earlier Amendment to “Small Company”-The threshold for paid-up capital has been increased from "not exceeding Rs. 50 lakh" to "not exceeding Rs. 2 crore," and the turnover threshold has been increased from "not exceeding Rs. 2 crore" to "not exceeding Rs. 20 crore."
Further Amendment to “Small Company”- MCA has further revised this definition by increasing the threshold for paid-up capital from "not exceeding Rs. 2 crore" to "not exceeding Rs. 4 crore," and the turnover threshold from "not exceeding Rs. 20 crore" to "not exceeding Rs. 40 crore."
Small Company would be considered as having –
»Paid-up capital –less than 4 crore
»Turnover- less than 40 crore
Note: For small Company both criteria needs to be fulfilled. If any conditions breaches, will be considered as other than small Company
These measures taken by the MCA will encourage entrepreneurship and innovation, promote ease of doing business, and create a favourable environment for small businesses to thrive.
The revised definition for small companies comes with several benefits, including the elimination of the requirement to prepare a cash flow statement as part of the financial statement. This will help reduce the time and cost of compliance for small companies, enabling them to focus on other business operations-
»Small companies will also have the advantage of preparing and filing an Abridged Annual Return, which is a shorter version of the full Annual Return. This will save small companies time and resources, making compliance easier and less time-consuming.
»In addition, small companies will no longer be required to have a mandatory rotation of auditors, which will also help reduce the cost of compliance. The Auditor of a small company will not be required to report on the adequacy of the internal financial controls and its operating effectiveness in the auditor's report, further simplifying the compliance process for small companies.
»Small companies will also be required to hold only two board meetings in a year, reducing the time and cost of compliance further. The Annual Return of the company can be signed by the company secretary or, where there is no company secretary, by a director of the company, making it easier for small companies to comply with this requirement.
»Small companies will face lesser penalties under Section 466B of the Companies act 2013 compared to larger companies, making it easier for them to comply with regulatory requirements without incurring substantial costs in penalties.
This move will provide relief to a more significant number of small companies, reducing their compliance burden and enabling them to focus on business growth and development.
The section states that if a company or any of its officers, including directors, default in complying with any provisions of the Act or any rules made thereunder, they may be liable to pay a fine.
»The amount of the fine may be prescribed in the Act or the rules, or it may be left to the discretion of the court or the authority imposing the fine. The section also provides for a maximum amount of fine that may be imposed in certain cases.
»The section further states that the fines imposed may be recovered as if they were a debt due to the government. This means that the fines may be recovered in the same manner as taxes or other government dues.
»It is important for companies and their officers to ensure that they comply with all the provisions of the Companies Act 2013 to avoid any fines or penalties.
The reduced compliance burden will help small companies focus on innovation and entrepreneurship, leading to the growth of the economy and the creation of employment opportunities.
Recently, By Companies (Amendment) Act,2020 Amendment has been done and that is Effective from 22nd January 2021, Very first 466B introduced by Inserted by the Companies (Amendment) Act, 2017, w.e.f. 09.02.2018.
S. 446B. Notwithstanding anything contained in this Act, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
Explanation.—For the purposes of this section-
(a) "Producer Company" means a company as defined in clause (l) of Section 378A;
(b) "start-up company" means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.
"Private Company" defined under Section 2(68) of the Companies Act, 2013, a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—that has a limited liability and is privately held. It restricts the right to transfer shares and limits the number of members to 200. The company cannot invite the public to subscribe to its shares, and it must have a minimum paid-up share capital of one lakh rupees or more, as prescribed.
Normally, we understand a Start-up Company is a newly established business that is typically characterized by innovative ideas, a focus on technology or digital products or services, and a high potential for growth. Start-ups often operate in an uncertain and rapidly changing environment and rely on funding from investors to scale and expand their operations which is very true but while looking after some government Registration or Compliances definitions are very specific and should be considered accordingly to avail the benefits.
Technically the Startup Company should be taken per Notification No. G.S.R. 34 (E) dated January 16, 2019 issued by Department for Promotion of Industry and Internal Trade (DPIIT)
To qualify as a start-up company meet the eligibility criteria as follows-
»Company or partnership firm is considered a startup if it is incorporated as a private limited company under the Companies Act, 2013, or registered as a partnership firm under Section 59 of the Partnership Act, 1932, or a limited liability partnership under the Limited Liability Partnership Act, 2008, in India.
»The startup should not be more than 10 years old from the date of its incorporation or registration in India.
»The turnover of the company must not have exceeded Rs. 100 crores in any of the previous financial years.
»The company must be working towards innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property.
»*The company must not have been formed by splitting up or reconstructing an existing business.
*Explanation –
As per the definition of a "startup" provided by the Department for Promotion of Industry and Internal Trade (DPIIT), an entity formed by splitting up or reconstruction of an existing business shall not be considered a startup.
This means that if an entity is formed by splitting up an existing business or as a result of the reconstruction of an existing business, it will not be eligible for various benefits and incentives provided to startups by the government. This is because the primary aim of supporting startups is to encourage new and innovative business ideas, and to promote entrepreneurship in the country. Entities formed by splitting up or reconstruction of an existing business do not meet these criteria, as they are not new business ideas or ventures, but rather an extension or restructuring of an existing business.
Once a company meets the eligible criteria discussed before, it can apply for a certificate of recognition to DPIIT by submitting an application along with relevant documents. After due verification, DPIIT may issue a certificate of recognition to the company.
Several benefits of being recognized as a startup by the government or other relevant institutions. These benefits can include:
»Access to funding: Recognized startups may be eligible for funding from various government schemes or programs, as well as from private investors or venture capitalists who are interested in supporting innovative businesses.
»Tax benefits: In some countries, recognized startups are eligible for tax exemptions or reductions for a certain period, which can help reduce their financial burden and increase their cash flow.
»Regulatory benefits: Some countries offer regulatory benefits, such as simplified compliance requirements or faster approval processes for licenses or permits, to recognized startups.
»Networking and mentorship opportunities: Recognized startups may have access to networking events, mentorship programs, and other resources that can help them connect with other entrepreneurs, investors, and industry experts.
»Brand recognition and credibility: Being recognized as a startup by the government or other institutions can enhance a company's brand recognition and credibility, which can be beneficial in attracting customers, investors, and partners.
A startup company under the Companies Act, 2013 is a type of private limited company that is newly incorporated which are not completed 10 years from the date of Incorporation, working towards innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property and turnover of the company is less than Rs. 100 crore in any of the previous financial years. Once the company meets the eligibility criteria and obtains a certificate of recognition from DPIIT, will be considered as Startup Recognised Company under the Companies Act, 2013.
Under Companies Act, 2013, several other benefits and exemptions provided for startups to encourage entrepreneurship and innovation in the country and benefits for startups -
»Reduced compliance burden: Startups can avail of relaxed compliance requirements under the Companies Act, 2013. For instance, startups with a turnover of less than Rs. 50 crores are not required to appoint an independent director on their board, and the requirement of holding a minimum number of board meetings has also been reduced.
»Fast track incorporation: Startups can avail of a fast track incorporation process under the Companies Act, 2013, which enables them to incorporate their company in just one day.
»Differential voting rights: Startups can issue shares with differential voting rights, which enables founders to retain control of their company while raising funds from investors.
»Exemption from certain provisions: Startups are exempted from certain provisions of the Companies Act, 2013, such as the requirement of holding annual general meetings and the requirement of appointing an independent director.
»Tax benefits: Startups can avail of various tax benefits under the Companies Act, 2013. For instance, startups can apply for tax exemption under section 80IAC of the Income Tax Act, which provides a tax holiday for three consecutive financial years out of the first ten years since incorporation.
»Lesser Penalities provision: start-ups are also eligible for lower penalties under the Companies Act, 2013 like with the introduction of section 466B Companies Act, 2013. The penalties for non-compliance with various provisions of the Act are generally lower for startups as compared to other companies. This is aimed at reducing the burden of penalties on startups, as they may not have the financial resources to pay higher penalties. More, it is important to note that startups must still comply with all the relevant provisions of the Act, and non-compliance may still result in penalties, albeit lower ones.
Startup recognized by the DPIIT, the entity may apply for tax exemption under Section 80IAC of the Income Tax Act. If the application is approved, the startup can avail a tax holiday for 3 consecutive financial years out of its first ten years since incorporation.
However, there are certain eligibility criteria that the startup must meet to apply for tax exemption under Section 80IAC. These include:-
The entity should be a recognized startup by the government.
Only Private limited companies or Limited Liability Partnerships (LLPs) are eligible for tax exemption under Section 80IAC.
The startup must have been incorporated after 1st April 2016.
If a startup meets these conditions, it can avail of the tax holiday for a period of three consecutive years out of its first ten years of operation.
This means that the startup will not have to pay income tax on its profits for the three years that it chooses to avail of the tax holiday. The introduction of this tax holiday concept is expected to provide a boost to the startup ecosystem in India and encourage more entrepreneurs to start their own businesses.
It's worth noting that startups need to fulfill additional conditions to avail of tax benefits under Section 80 IAC, such as maintaining books of accounts, getting their accounts audited, and fulfilling the conditions related to the use of funds. Further, the tax exemption under Section 80 IAC can be a significant advantage for startups as it helps them conserve cash flows and reinvest in the business during the initial years of operation.
Startup is recognized by the DPIIT, it may apply for angel tax exemption under Section 56 of the Income Tax Act. The angel tax is a tax on the excess valuation of shares that startups issue to investors, and it has been a major concern for startups in India. However, startups that meet the eligibility criteria can apply for exemption from this tax.
The eligibility criteria for angel tax exemption under Section 56 of the Income Tax Act are as follows:-
The startup must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
The aggregate amount of paid-up share capital and share premium of the startup, after the proposed issue of shares, if any, must not exceed INR 25 crores.
The angel tax, also known as the tax on the valuation of shares, is levied on startups when they receive angel investments that exceed the fair market value of their shares. This tax has been a significant concern for many startups as it can significantly increase their tax liability and impact their cash flows. The government has taken steps to address this issue and provide relief to startups by introducing the angel tax exemption for eligible startups. This exemption can help reduce the financial burden on startups and encourage more angel investments in the ecosystem.
The angel tax exemption is not automatic, and startups need to apply for it.
To apply for angel tax exemption, a startup needs to submit an application to the Inter-Ministerial Board (IMB), which is responsible for evaluating applications and granting exemptions. The application must include details about the startup's business, financials, and the proposed issue of shares. Once the IMB grants the exemption, the startup can issue shares to investors without worrying about the angel tax. This exemption can be a significant relief for startups as it helps them attract investments without the burden of additional taxation.
Step-by-steps process-
Step 1: Register on the DPIIT portal: The startup needs to register on the Department for Promotion of Industry and Internal Trade (DPIIT) portal. Once registered, the startup can apply for Angel Tax Exemption.
Step 2: Submit the application: The startup needs to fill the online application form with the required details and upload the necessary documents such as audited financial statements, details of investors, shareholding pattern, etc.
Step 3: Await Inter-Ministerial Board approval: Once the application is submitted, it will be reviewed by the Inter-Ministerial Board of Certification. The board will examine the application and issue a certificate of eligibility if the startup is found to be eligible for Angel Tax Exemption.
Step 4: Submit the certificate to the tax department: The startup needs to submit the certificate of eligibility to the tax department along with its income tax return. The tax department will then verify the certificate and grant Angel Tax Exemption if everything is found to be in order.
It is important to note that startups need to apply for Angel Tax Exemption within 45 days from the end of the financial year in which the investment was received.