For the past few years, India has seen a substantial rise in the development of Startups trying to establish their identity in the financial market of the world. With many ambitious projects coming up, it becomes necessary that such new emerging businesses, however small or big they may be, conform to the laws, rules and regulations of the land.
The most noteworthy examples of Successful startups in India are OYO in hospitality, OLA in travel and PAYTM in finance.
Compliance and its Importance
The startups in India often overlook the importance of compliance either due to lack of knowledge or due to their let go attitude. To function smoothly in the market, it is essential for startups to be compliant with the rules, regulations and laws set forth by the government.
Programs like 'Startup India' and 'Make in India' by the Government have facilitated a large-scale increase in establishments of new businesses and have comparatively simplified compliance for startups. Startups, after being registered with the Ministry of Labour and Employment, are allowed to self-certify their compliance with various labor laws and are also exempt from inspection under the same.
A successful startup, as it grows over time, needs a compliance mechanism to deal with the ever-rising needs of legal compliance. Every act of such an established startup, from hiring new employees to establishing new office is governed by the laws of the land and compliance to such laws, is of paramount importance.
A startup can fulfill its compliance requirements either by establishing a legal department within the company or by outsourcing its legal audit to experts in the field.
Some important Compliance for Startups:
1. Compliance under Labour Law
Labour laws in general deal with compliances under the Minimum Wages Act, Workmen's Compensation Act, Industrial Dispute Acts, etc.
The most important among these acts in compliance with provisions of Sexual Harassment of Women at Workplace Act which is often overlooked by the startups and later have to face a penalty for the same. Every employer by an order in writing has to form an Internal Complaints Committee under Section 4 of the act where women can register their Complaints regarding Sexual harassment.
In case of non-compliance with the provisions of the act, a fine up to 50 thousand rupees shall be imposed if the offense is repeated more than once punishment imposed can be twice of that imposed at the first instance. Non-compliance can also lead to cancellation of the employer's license or withdrawal, non-renewal or cancellation of registration required for business by government or any other local authority.
2. Compliance under Environmental Law
Increasing environmental awareness has made the laws related to the environment more stringent and non-compliance with them leads to higher penalties.
Post the enactment of the National Green Tribunal Act, 2010, which incorporates all other environmental laws under its umbrella, the penalties for non-compliance with such laws have increased manifold.
Section 26 (1) of NGT Act, 2010 states that the tribunal can award a fine up-to 10 crores and imprisonment of 3 years or both for the non-compliance of an order, award, or decision by NGT. In case of a continuing offence, the fine can be escalated up-to 25,000 Rupees per day until such continuance.
In Sterlite Industries (I) Ltd. Vs. Union of India and Ors., Supreme Court imposed the penalty of Rs.100 Crores on Sterlite Industries for contravening the provisions of the Air Act and causing pollution beyond the permissible limits. Sterlite Industries had set up and was operating Copper Smelter Plant in Tamilnadu.
3. Compliance under Companies Act, 2013
A startup that is incorporated as a company under the Companies Act, 2013, must conform with its provisions. The Companies Act, 2013 regulates the appointment of directors, the manner in which the annual general meeting and the board meeting is to be conducted, appointment of auditors, other basic requirements like having PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number), bank account, etc. after the incorporation. The businesses are expected to comply with the rules and regulations applicable to them to avoid the penalty that may be incurred in case of non-compliance.
4. Compliance under Income Tax Act, 1961
Every business is liable for filing of income tax returns and other procedural liabilities under the act. The Income Tax Act specifies a time limit for such filing and in case of any discrepancy, for an appeal to the higher authorities. It is essential that business, small or big, take such rules seriously and comply with them accordingly.
5. GST Compliance
Businesses or startups having less than Rs.40 lakhs per annum turn over are exempted from being considered for GST registration. This provision will help small businesses rise at a faster pace without being liable to GST in the initial days of their growth. The amalgamation of multiple taxes under GST has facilitated the expansion of profits, specifically for startups.
The benefits, however, do not release startups completely from their liability to comply with the provisions of GST. As the startup grows over time, it needs to comply with the rules under GST.
There are other laws in India which one needs to comply with to run a successful startup. It is difficult for a business entity to keep a check on all the compliances it needs to fulfill along with its profit-making goal.
How does a Startup deal with its compliance obligation?
The main aim of any startup is to maximize its profits. While doing so, it becomes difficult for them to look into other supporting requirements. Legal compliance is the most important wheel that keeps any business going needs to be looked into earnestly.
Many companies have their own legal departments that look after compliance requirements, but startups being new, need to approach an expert in this field for assistance.
Such outsourcing helps startups in timely compliance with the required laws, completion and maintenance of records needed for the same, reduction in costs required for maintaining the compliance machinery on their own, filling up the vacuum created due to lack of legal knowledge and single-minded focus on profit maximization.
Compliance with the relevant laws of the land is vital for the successful setup and efficient rise of startups. Compliance ensures that no penalty is imposed on a budding startup at any point in its growth and helps it stay out of any other possible difficulties.