Understanding Legal and Tax Implications of Company Registration

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A company is basically an artificial person, in that it is a different entity from the people who own, manage and support its operations. Companies are often established to make a profit from their operations, while some may be constituted as non-profit organisations.

The procedure of incorporating a company has been made simpler over the years, which encourages full compliance by the companies. However, to prevent penalties or punishments, management should be completely informed of post-incorporation compliances and implications. The directors and shareholders are needed to be aware of the legal obligations that arise when a company is registered or incorporated.

What is the Purpose of Company Registration?

Company registration is important for the following mentioned reasons:

1. Limited liability protection: Promoters’ personal assets are protected and are not liable for the company’s debts.
2. Facilitates secure funding: Enhances credibility, attracts investors.
3. Building brand recognition: Brand becomes a valuable asset which can be passed down and there is potential for sale.
4. Legal entity status: Company is a separate legal entity, can enter contracts and own property.
5. Perpetual succession: Company exists independently of shareholders, ensures continuity.
6. Credibility and trust: Registered companies are trusted by customers, suppliers and partners.
7. Access to government tenders: Eligible for government projects and contracts on registration.
8. Tax benefits and incentives: Potential tax advantages provided by the government to registered companies.

Legal Implications of Company Incorporation or Registration

On registration of a company in India, the following legal implications follow and these compliances become compulsory for the company to adhere to:

1. Form INC-20A: Declaration for Commencement of Business

Form INC-20A, also known as the Declaration of Commencement of Business, is a mandatory filing for companies incorporated on or after 02/11/2018. This form must be submitted with the Ministry of Corporate Affairs (MCA) by the directors within 180 days from the date of incorporation for companies with share capital.

2. Appointment of Auditor (Section 139)

According to Section 139 of the Companies Act 2013:

• The first auditor of the company must be appointed by the Board of Directors within 30 days of incorporation. In other cases, the appointment should take place within 90 days during an Extraordinary General Meeting.
• The auditor can be appointed for a maximum term of 5 years for individuals and 2 terms of 5 years for audit firms.
• The appointment details must be filed using E-Form ADT-1 with the Registrar of Companies within 15 days of such appointment.

3. Board and Annual General Meeting (AGM)

As per the Companies Act, 2013:

• The first Board Meeting should be held within 30 days of incorporation. Subsequently, at least 4 Board Meetings must be held every year, with a maximum time gap of 120 days between two meetings. Notice of Board Meetings should be given at least 7 days in advance through electronic mode.
• The Annual General Meeting must be held each year, apart from other meetings. The first AGM must be conducted within 9 months from the closing of the first financial year. For subsequent years, it must be held within 6 months.

4. Filing of Annual Return (Form AOC-4) and Form MGT-7A

Form AOC-4 is the annual return required to file the company’s financial statement for every financial year with the Registrar of Companies. It must be submitted within 30 days of the Annual General Meeting.

Form MGT-7A is specifically for companies like One Person Company (OPC) and Small Company from the financial year 2020-2021 onwards. Unlike MGT-7, which is for companies other than small and OPC, MGT-7A doesn’t require certification by a Company Secretary.

5. Maintaining Statutory Records

The company is obligated to maintain various statutory records, including but not limited to:

• Register of the Company
• Register of Members (MGT-1)
• Register of Debenture-holders (MGT-2)
• Register of Directors and Key Managerial Personnel (no particular format)
• Register of Charges (CHG-7)
• Register of Renewed and Duplicate Share Certificates (SH-2)
• Register of Shareholders
• Register of Shares/Other Securities Bought Back (SH-10)

6. DIR-3 KYC (To Keep Director DIN Active)

Every Director who was assigned a DIN before the end of the fiscal year and holds the status ‘Approved’ is obliged to file form DIR-3 KYC by September 30th of the following fiscal year. Failure to comply will result in a Rs. 5000 fine and a DIN status of ‘Deactivated owing to non-filing of DIR-3 KYC’.

7. DPT-3 Return

DPT-3 is an annual return that must be filed by companies having any amount of loan or advances not considered as deposits. The return should be submitted within 90 days of the closure of the financial year, i.e., by 30th June. Certain companies like Banking companies, Non-Banking Financial Companies and housing finance companies registered with the National Housing Bank are exempted from this requirement.

8. MSME Return

Companies that receive supplies of goods or services from Micro and Small Enterprises and delay payments exceeding 45 days from the date of acceptance or deemed acceptance must submit a half-yearly return to the Ministry of Corporate Affairs. The return should include the reasons for the delay in payment.

Tax Implications of Company Registration in India

On registration of a company in India, the following taxation implications and compliances become necessary for the company:

1. Advance Tax

Advance Tax refers to paying Income Tax in advance during the financial year, rather than a lump sum payment at year-end. 

Applicability: Advance Tax applies if the total tax payable (on estimated total income) for the financial year is equal to or greater than Rs. 10,000.

2. Tax Deduction at Source (TDS) and Tax Collection at Source (TCS)

Tax Deduction at Source (TDS)

TDS compliance is important, as any non-compliance can lead to penalties, interest and disallowance of expenses. TDS is applicable on specific payments, exceeding the threshold limits as mentioned in the Income Tax Act.

Common Payments Requiring TDS:

• Salary Payments (Sec 192)
• Payment to Contractors (Sec 194C)
• Payment to Professionals/Freelancers (Professional Fees) (Sec 194J)
• Payment of Commission or Brokerage (Sec 194H)
• Rent Payments (Sec 194-I)
• Payment to Non-Residents (Sec 195)

TDS Compliances and Consequences of Non-Compliance:

Monthly Payment of TDS: Once tax is deducted, the deductor (payer) must deposit the TDS to the government monthly using Challan ITNS-281. Due dates for payment:

• For the first 11 months (April to February), deposit by the 7th of the next month.
• For the last month (March), deposit by 30th April.

Quarterly TDS Statements: A person required to deduct TDS must file quarterly statements (returns) of TDS using different forms for different types of payments. Due dates for TDS Statements:

• Quarter 1 (April to June): 31st July
• Quarter 2 (July to September): 31st October
• Quarter 3 (October to December): 31st January
• Quarter 4 (January to March): 31st May of the next financial year.

Tax Collection at Source (TCS):

TCS applies to sellers who collect an additional amount as tax from the purchaser and deposit it with the government. TCS provisions are applicable to specific transactions.

TCS Compliances and Consequences of Non-Compliance:

Monthly Payment of TCS: The seller must deposit TCS to the government monthly. The due date for depositing tax is seven days from the month end in which tax was needed to be collected.

Quarterly TCS Statements: A person required to collect TCS must file quarterly statements (returns) of TCS in Form 27D. Due dates for TCS Statements are the same as TDS statements.

3. Computation of Total Income and Filing of Income-Tax Return

Applicability: All companies that are registered in India have to file an IT return, irrespective of income, profit or loss. Even dormant companies with no transactions are required to file the return in ITR-6.

Due Dates: Companies to whom Transfer Pricing provisions apply (TP Report): 30th September; Other Companies: 31st December.

Other Income-tax Act Compliances

• Tax Audit u/s 44AB: Applicable if turnover exceeds specified threshold (Rs. 1 crore / Rs. 5 crores, depending on cash receipts/payments).
• Transfer Pricing: Applicable if transfer pricing provisions are applicable.
• Valuation Report: May be required in certain cases.
• Report/Certificate from CA: May be required for claiming deductions/exemptions.

4. Goods and Services Tax (GST) Act Compliances

GST Returns and Payment

Filing GST returns is mandatory, even for NIL transactions. Various returns are filed monthly/quarterly/annually, based on the nature of the business.

Consequences of Non-Compliance:

• Late filing leads to cascading effects, heavy interest, fees and penalties.
• Delay in tax payment attracts interest at 18% per annum.
• Late filing fee of Rs. 50 per day (maximum Rs. 5000) for late filing of GST returns.

Other GST Compliances

• Determining HSN/SAC and charging appropriate GST rates.
• Proper invoicing and obtaining LUT for exports.
• Maintaining records for ITC reconciliation with GSTR-2A.

Final Thoughts

Understanding the legal and tax implications of company registration is of utmost importance for any business venture. Registering a company provides limited liability protection, secure funding opportunities and credibility among stakeholders. It also grants legal entity status and ensures perpetual succession, contributing to the company’s stability and continuity. 

Compliance with post-incorporation legal requirements, such as filing necessary forms, maintaining statutory records and adhering to income tax and GST regulations, is important to avoid penalties and ensure the company’s smooth operation. By upholding these compliances, companies can build trust, protect assets and unlock various benefits offered by the government for business growth and development.