ESOP’s – Key Changes for StartUps

Change made for Startups

MCA has announced two changes. One, that will increase the base of sweat equity that a startup can issue. Two, that will expand the horizon of sweat equity to promoters and director. Both the changes have are described below.

Increase in limit of Sweat equity shares issued by start-ups

The Rule 8(4) of Rules, 2014 restricted companies from issuing sweat equity shares in excess of 25% of the paid up capital at any time. The rule also limits the issuance of sweat equity shares per year to 15% of the paid up capital or issue value of Rs.5 crores whichever is higher.

The amendment in new announcement expressly permits Start-ups to issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration.

The limits of 15% of paid up per year or capital or Rs.5 crores whichever is higher will still need compliance.

Stock options to promoters and shareholder/directors of startups

The new announcement allows Startups to issue the sweat equity under ESOP to their promoters and to directors who hold more than 10% for the first 5 years from the date of their incorporation. The restriction on issuing stock options to promoters and such directors continues for all other companies

In order to provide this benefit MCA has used notification to exempt the startups from application of Clause (i) and (ii) under Explanation C of Section 62 (1)(b) of Act, 2013 that defines the term ‘Employee’. The Explanation in Section 62(1)(b) reads as below.

Explanation:

For the purposes of clause (b) of sub-section (1) of section 62 and this rule ”Employee” means-

(a)   a permanent employee of the company who has been working in India or outside India; or

(b)   a director of the company, whether a whole time director or not but excluding an independent director; or

(c)    an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include-

             (i).   an employee who is a promoter or a person belonging to the promoter group; or

           (ii).   a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

[The clauses (i) and (ii) given in blue does not apply on DIPP registered startups for 5 years]

VidyaSunil & Associates is into practice of Tax Complaince, Audit, Accounts , Corporate / Business Finance & Outsourced CFO Services.

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GST Audit

The term ‘audit’ under GST means the examination of records, returns and other documents of a registered person to verify that the turnover declared, taxes paid, refund claimed and input tax credit availed are correct.

Types of Audit in GST

1.    Annual Audit by a CA or CWA

The GST Audit Applicability has been specified by the GST Council, as per the GST Audit limit. Every registered person whose turnover during a financial year crosses the GST Audit turnover limit of Rs. 2 Crores should get his accounts audited by a Chartered Accountant or Cost Accountant. While furnishing the annual return in Form GSTR-9, a copy of the audited accounts and a reconciliation statement (reconciling the value of supplies declared in the annual return with the audited financial statements) should be submitted.

2.    Audit by GST Authorities

a.General audit

Under General audit, the Commissioner or any officer authorised by him can undertake audit of any registered person.

General GST Audit process:

• The audit will be conducted at the registered person’s place of business or in his/her office.
• The person will be informed about the audit by a notice at least 15 working days prior to the date of audit.
• The GST audit due date will be 3 months from the date of commencement of audit, i.e. audit has to be completed within 90 days. This can be extended by another 6 months if the Commissioner feels that the audit cannot be completed in 3 months. The reasons for extension have to be recorded in writing.
• After the audit is completed, the Officer should inform the registered person, within 30 days, about the findings, reasons for the findings and his rights and obligations.
• If the audit results in detection of tax not paid or short paid or wrongly refunded or input tax credit wrongly availed or utilised, the Officer will initiate action for recovery of the tax.

b.Special audit

During a process of scrutiny, enquiry or investigation, if an Officer feels that the value of tax has not been correctly declared or wrong credit has been availed, he can initiate a Special audit. Under Special audit, the registered person will be directed to get his accounts audited by a Chartered Accountant or Cost Accountant nominated by the Commissioner. The nominated Chartered Accountant or Cost Accountant should submit the GST Audit report within 90 days. This period can be extended by another 90 days, if required. If the audit results in detection of tax not paid or short paid or wrongly refunded or input tax credit wrongly availed or utilised, the Officer will initiate action for recovery of the tax.

Hence, the process of audit under GST is simple and structured. As a tax payer, it is important to practise good compliance in order to avoid audit by tax authorities. Also, tax payers whose turnover exceeds Rs. 2 Crores should get their accounts audited by a CA or CWA.

GST Audit 

GST audit is a process of verifying the compliance of a business with the relevant legislation through an examination of the accounts and records of that business and is essential for any tax system.

Every registered person whose aggregate turnover during a financial year exceeds rupees two crore has to get his accounts audited by a chartered accountant or a cost accountant and furnish a copy of audited annual accounts and a reconciliation statement, duly certified, in FORM GSTR-9.

“Audit” has been defined in section 2(13) of the CGST Act, 2017 and it means the examination of records, returns and other documents maintained or furnished by the registered person under the GST Acts or the rules made there under or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of the GST Acts or the rules made there under.

Sec 31 (4) of The Karnataka Value Added Tax Act, 2003 states that – Every dealer whose turnover in a year exceeds rupees one hundred lakh shall have his accounts audited by a Chartered Accountant or a Cost Accountant or a Tax Practitioner subject to such conditions and such limits as may be prescribed and shall submit to the prescribed authority a copy of the audited statement of accounts and prescribed documents in the prescribed manner.

On comparison of the audit requirement under the GST and VAT regime, audit under GST regime is more detailed and emphasis is on examination of records, returns and other documents maintained and compliance with the provisions of the GST Acts or the rules made there under.

VidyaSunil & Associates is into practice of Tax Complaince, Audit, Accounts , Corporate / Business Finance & Outsourced CFO Services.

Advise for contacting VidyaSunil & Associates;

Website : http://www.vidyasunilassociates.com

E Mail ID : vidyasunilassociates@gmail.com

Cell No. : +91 9739834819