The start up of any business requires lot of time and effort. I would compare start up process to the time taken before a flight takes off. Every flight first runs on the ground for some time to gain momentum and then takes off. Before you fligh high, have you done your ground work?
There is a famous maxim “ignorantia juris non excusat” Meaning Ignorance of law is no excuse!
Every citizen ought to know the law of the land. Ignorance of the law excuses no one because the contrary would be to confer a premium on ignorance which would afford a defence to every transgression of the law. It lays down the importance of knowing what laws are applicable to your business.
Just as you put together a business plan, you need to approach the legal aspect of a business in a systematic manner. Begin with the laws pertaining to the basics of starting a business. List down all the aspects and gather all the required information.
Typically, to a small scale business the applicable acts are: Income Tax Act, Sales Tax (VAT), Service Tax, Provident fund, Shops and Establishment Act and Company Law (if the entity is a Private Ltd company)
In addition to this, there are several acts which can have implication on your business like trademark and patent acts, intellectual property rights, laws relating to quality control, child labour laws, environmental laws including recycling laws and the discharge of hazardous waste materials, Consumer Protection laws against fraud and unfair advertisement, privacy laws, workplace safety laws, human rights and many more.
While it is not possible for me to answer everything, I will focus only on applicability of some of the common laws and answer some of the frequently asked questions.
Frequently Asked Questions:
Ques: I am doing small trading of cloth pieces. Should I get registered under sales Tax? When am I covered under Vat.
Ans: The exemption limit as per Haryana Vat Act is Rs 500,000/- per financial year. So, if you are trading in goods exceeds this limit in a financial year, you need to register your business under HVAT. The exemption limit varies for different states. The limit also varies for importers and manufacturers. A dealer can voluntarily also register even if the turnover is low.
Dealers having turnover exceeding 5 lakhs should register within 30 days from the date of liability. Non compliance can result in heavy penalties.
Ques: Can I claim the benefit of VAT paid by me on purchases? Do I need to maintain proper books of accounts?
The Registered dealers are allowed to collect VAT payable by them from the immediate buyer and deposit the tax before the due dates. They can claim the VAT paid on purchases (input tax) made from a registered dealer only against the VAT on sales (output tax) and deposit the balance tax . Proper books of accounts have to be prepared for each commodity, the stock, purchases and sales. To know more about VAT, check http://www.mkfinancials.in/resources/faq_s_for_you/vat_faqs
Ques: Are there any exemptions for small dealers under VAT laws?
Ans: There is a Composition Scheme for small dealers whose turnover is low (as specified from time to time and varies for different locations) and are unable to maintain the records as per the requirements of VAT Act. These dealers have to pay a lump sum as VAT on the sale value of goods. The VAT paid will not be shown in the invoices. They can account for the total turnover and pay VAT on the same at the end of the return period.
Generally, Small dealers having gross turnover exceeding Rs. 5 lakhs but less than Rs. 50 lakhs( limit keeps changing) have option of composition scheme.
Ques: I am doing consultancy business/ running a small parlour. Should I register under Service Tax?
ANS: The exemption limit under Service Tax Act is Rs 10 lakhs and a service provider is required to register himself as soon as his receipts exceed Rs 9 lakhs in a financial year.
Ques: Is every Service covered under Service Tax Act?
Ans: No, every Service is not liable for service tax. You need to check the list of services and the applicable provisions to the specific industry.
Ques: What if I forget to collect service tax from the customer? Do I need to maintain books of accounts?
Ans: Service Tax liability lies primarily on the service provider and in case he fails to collect the tax, she shall have to deposit the same from his pocket. So, non collection of tax is not a ground to evade the liability. Proper books of accounts have to be prepared by a registered service provider.
Separate accounts have to be maintained for commodities and Services as per HVAT and Service tax in case both are applicable to your business. For eg: A Beauty Parlour rendering services and also selling beauty products will levy service tax on services and vat on sale of products and have to maintain separate accounts for services and sale of products.
Ques: I am a small proprietory business. I have 5 employees. Should I register under Employees Provident Fund Act?
Ans: Employees Provident fund Act is applicable to you if you are hiring twenty or more persons including temporary employees. To know the provisions of Employee Provident Fund and Misl Act follow the link http://www.mkfinancials.in/resources/misc/epf_act
Ques: Who is covered under Shops and Establishment Act?
Ans: Shops and Establishments Registration is mandatory in some cases for businesses, as long as they qualify as an “Establishment” under the Shops and Establishment Act. “Establishment” means a shop, commercial establishment, residential hotel, restaurant, eating house, theatre, or other place of public amusement or entertainment to which this Act applies and includes such other establishment as the [State] Government may, by notification in the Official Gazette, declare to be an establishment for the purposes of this Act.
Ques: Do internet businesses need to register under the Shops and Establishments Act?
Ans: In most States, the law was passed when there was obviously no internet, and virtual offices existed only in the pages of science fiction books. Since most start-up entrepreneurs today choose to initially work out of home, or collaborate remotely with each other and virtual offices are not establishments under the Act, you will not need to worry about registration. But, if you work out of an office and your products or services are sold online only, you could exploit the loophole that no customers are purchasing from your shop, and hence registration would not be necessary. If however, you also entertain walk in clients and sell products and services to them, that loop-hole would no longer be available to you to use.
Ques: Do I need to deduct TDS on payments?
Ans: If you are doing business as a Pvt Ltd Company, you have to obtain Tax deduction Account Number TAN and deduct TDS on several kinds of payments as applicable to your business. If you are a proprietary concern or a partnership firm, TDS provisions shall be applicable to you only if your turnover crosses the limit as laid down from time to time and you are covered under Tax Audit.
Failure to apply for PAN and TAN Number attracts a penalty of Rs. 10,000/-.
Ques: I am small entrepreneur. Am I mandatorily required to maintain entire books of accounts? What all am I required to maintain?
Ans: As several acts are applicable to one business, it is advisable to maintain proper books of accounts if you are registered dealer under VAT and Service Tax Act. If your turnover crosses 1crore in a financial year, you are required to maintain complete financial records and get them audited through a qualified chartered accountant.
Failure to maintain books or documents invites a penalty of Rs 25,000/- and failure to get the accounts audited and furnish the tax audit report invites a penalty of 0.5% of total sales, turnover or gross receipts, or Rs. 1,00,000 whichever is less.
A small entrepreneur in non audit category should ideally maintain proper record of the stock, sale and purchase invoices, receipts of taxes paid and bills of expenses incurred.
Ques: When to deposit the taxes?
Ans: There are several taxes and consequently different due dates for deposit of vat, service tax, tds and income tax .Refer our website to know the key dates http://www.mkfinancials.in/resources/key_dates
Ques: Can I pay taxes online?
Ans: Income tax, Tds collected and Service tax can be paid online easily Refer the link below. Click on the type of tax and you have to fill an online form and pay taxes through internet banking. Haryana Vat is still not online so far.
Refer link for payment of taxes.http://www.mkfinancials.in/resources/pay_taxes
While every effort has been made to answer correctly the frequently answered questions, the answers are for general purpose and cannot substitute the personalized consultancy after studying the financial requirements of the business. For specific queries, users can write to me at firstname.lastname@example.org
As a new member at GurgaonMoms, you will see me writing a lot for all of you. Pls post your comments, querries and more questions here , which shall be answered in the next article.
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