Basics of direct and indirect tax - from our knowledge session at SINE

Couple weeks back, mymuneemji was at Society of Entrepreneurship and Innovation at IIT Mumbai.

Idea of the cell chief Ms. Bhatt was to educate the startups on "must know" nuances of direct and indirect taxation. The StartupSaturday had decent response from the SINE startups and even few outsiders that day.

Our mission was to simplify the complex looking tax and get out the tangible benefit to the people attending. We kept it completely interactive and logical. Post that as well, there are few issues and queries from the audiences which we are resolving via emails and calls.

I felt like publishing a blog on key points on which the queries came up and how were they addressed by mymuneemji. I hope you will find this useful

Entity selection and formation:
Ms. Bhat was personally worried about this bit of information lagging in the startups and wanted us to educate them with the same.

• We suggest forming an entity from a long term point of view of you are confident in the basic business model. This will allow you to capitalise development expenses or at-least claim losses of the initial months in the profitable years.
• Also this will allow you to build transparency between the cofounders and the investors putting in effort or money At early stage. This will definitely allow you to build the track record for your startup.
• Best to have proprietary or a partnership when you feel you are just experimenting and have no clear business model around it.
• A useful decision chart for entity selection attached for your ready reference.

Service tax:
We discussed basics on what, when, how of the service tax law which is spreading its wings across the board.

Coverage of service tax is very wide with the advent of

• Negative list from the positive approach before. Now there are only exempt services which are defined. Rest all deemed to get coved!!
• Reverse charge is like TDS which requires the service recipient to be charging the same. Applicable for the recipient from Rupee 1 of the service provided!!

Benefits missed:

• Service tax credits are available across the board. Event the CENVAT or exciseable purchases is also available while paying the service tax. One should carefully account all the purchases so that no credit is missed.
• Specific cases like education institution, not for profit incubators, agricultural related services are exempt. In needs to study careful before deciding of the taxability and CENVAT in specific cases.

VAT and CST (State and Central Sales Tax)
Even in VAT, we went through the typicality of the local and interstate VAT. In this case as well the what, when and how were put across with the help of examples.

Need to know points:

• VAT is applicable to the goods and not on services. Some cases where there are inclusive contracts both VAT and service tax come into play. This phenomenon is called "workscontract".
• VAT works on the physical movement of goods and not on the addresses of the buyers and sellers. So LR becomes the base for a transaction and not the invoice.

Benefits

• First would be taking the set off of the vat paid while buying against the payable on selling. CST (insterstate tax) is not available for set off. Also no set off of excise duty against VAT.
• C forms can reduce the tax liability from regular state rate (selling state) to 2% only for the dealers in those goods.

TDS
Deductible by the payer of the payee's payable amount and paid to the government. This is more to avoid the tax evasion by the recipients and to make the collection of tax almost immediate instead of at the year end.

Typical things:

• Has different rates for different kinds of activities. Like for professional fee, it would be 10%while for contract it is 2% (1% in case of the individual deductee)
• The status of the deductee also matters like a proprietor or a PVT LTD company.
• Need to be vigilant before making the payments to the foreign vendors about the correct rate of tax. It ranges from zero to as high as 40% depending on various aspects of law.

Benefits:

• It is directly adjustable (if less than tax liability) or refundable (if more than the tax liability) year on year.
• We can apply for a lower deduction of TDS as a business if we feel that the total deduction is grossly more than the prescribed rate is higher than the actual track record of the tax paid and payable based on estimates.

There were other queries around knowing LBT and somethings on the Corporate laws which was addressed off hand.

Here are the things MyMuneemji shared with the team in the form of a handy duedate chart for all tax filing dates, event ppt and the MyMuneemji collateral. Moreover it's complementary for startups who want alerts on all the key duedates for signing up on the mymuneemji for the same.

Hope this helps!!