India has witnessed a phenomenal explosion in startups, becoming the third-largest ecosystem for startups globally. The rise is so rampant that over 1,12,718 DPIIT-recognized startups are operating in 56 different industrial sectors in the country.
The strategic focus on statutory compliance is a key element in this journey. Compliance with the intricate web of guidelines, rules, and laws safeguards the interests of customers, companies, the environment, and employees and serves as a linchpin for sustainable growth.
In this article, we delve into the ins and outs of statutory compliance within the Indian startup ecosystem. Here is everything you need to know about navigating these complexities and removing potential risks.
Statutory compliance is a crucial part of business setup and growth. Adhering to the required compliances protects employees, intellectual property, and the company’s reputation while building trust. It also establishes clear accountability of the company towards its employees, environment, and society.
What is Statutory Compliance? For a business, statutory compliance involves meeting legal, financial, and regulatory requirements set by the government. This involves rules for company formation, operations, taxation, labour, and finances, governed by specific laws to ensure businesses operate within the boundaries set by the government.
Adhering to these guidelines is crucial to prevent legal penalties and business closures, ensuring smooth operations and scalability. Compliance is an ongoing process, demanding regular monitoring and adaptation to evolving regulations.
Indian startups must ensure statutory compliance in four key areas;
Tax Compliances: PAN, TAN, and GST registration are necessary, along with filing tax returns, audits, and GST returns. Under the Startup India initiative, you can also get tax exemptions. Labour Laws: Startups must comply with requirements like fixed working hours, overtime, safety regulations, and prevention of discrimination in the workplace. Industrial Relations: Following the minimum wage conditions and having a leave policy aligned with government regulations is essential. Plus, some startups are required to have social security contributions, including PF, ESI, etc. Additional Compliances: In addition to these, there are environmental clearances, data privacy regulations, and IP protection. Is Statutory Compliance Easy for an Indian Startup? Navigating legal and regulatory complexities can overwhelm startup founders who often lack awareness and understanding of applicable laws. Limited time and resources further complicate the issue, leading to unintentional non-compliance.
Risks of Non-Compliance Non-compliance poses significant risks in three major ways: financial penalties, legal repercussions, and reputational damage.
An example of financial penalties was seen in 2023 when an automotive startup, Konwert India Motors Private Limited, was penalised for default in filing the MGT-14. The MGT-14 form files resolutions with the Indian Registrar of Companies under the Companies Act 2013.
Legal repercussions can also mean battling lawsuits in court and losing customer trust, investor confidence, and market value.
Amidst numerous risks, Mysa offers a streamlined solution for statutory compliances. Our experts and automated systems provide startups the advantage to concentrate on business development. We manage compliances, licences, accounting, audits, and registrations, ensuring a robust foundation for your enterprise.
What Are the Key Areas of Statutory Compliance in India? While the exact regulations and compliance requirements vary from industry to industry, every company must address a few primary areas. Here is a brief rundown of everything you need to know about the specifics of statutory compliance
1. Tax Compliances The Indian tax code represents a sophisticated yet accountable system businesses should follow to stay compliant. However, due to DPIIT recognition and the Startup India Initiative, startups can avail of tax holidays and exemptions provided they fulfil the requirements. Here’s the tax-related statutory compliance checklist startups must follow.
a. Direct Taxes (ITR, TDS) Governed by the Income Tax Act of 1961, startups are supposed to ensure TDS dedication according to their income tax. TDS is managed by the Central Board of Direct Taxes (CBDT). Under the TDS rule, every payment made in the favour of the assessee is subject to TDS deduction.
Employers are supposed to deduct TDS from employee’s wages and submit the details to the government. The employee can then file a TDS return to claim a refund of the deducted TDS.
In the Startup India Action Plan , the new companies can claim a tax holiday provided they satisfy the requirements.
b. Indirect Taxes (GST) Passed under the 101st Constitution Amendment Act of 2016, Indian companies are required to comply with the new GST rules. Under this amendment, excise duty, Octroi tax, customs duty, service tax, entry tax, entertainment tax, etc., are all consolidated under the Goods and Services Tax, making it a single indirect tax. GST implementation is complex and involves a complete change in the tax regime.There are as many as 178 forms of GST , and over 400 major changes have been made to GST rates on goods. Hence, it's essential to know the categories of GST applicable to your line of business and comply with the rules.
Struggling with GST Calculations? Use our free GST calculator c. Tax Liabilities for Investors Startups receiving funds from investors are also subject to taxation as it is deemed as “income from other sources”. So, this income is liable for taxation at corporate tax rates. This is also governed by the Income Tax Act, specifically under section 56(2)(viib) and section 68). In the Budget 2023-24, changes were made to the Angel tax (tax levied on investments into a company through sale of shares above market value), wherein now foreign investments are also taxed.
d. Tax Liabilities For Foreign Companies In India Foreign companies setting up shop in India are also liable to pay taxes in accordance with the Income Tax Act of 1961 and GST regulations.
Area Details
Direct Taxes (ITR, TDS) Income tax returns, tax deductions at source
Indirect Taxes (GST) Goods and Services Tax compliance
Investor Taxes Taxes on investments received
Foreign Company Taxes Taxes applicable to foreign companies operating in India
However, startups with DPIIT recognition are exempted from the new norms of the Angel Tax.
2. Industrial Relations and Labour Laws Implementing industrial relations and labour laws ensures fair working conditions, smooth dispute resolution, and prevention of discrimination in the workplace. Moreover, following these components of statutory compliance ensures stable growth and social harmony. The rules and regulations we will discuss in the next sections are meant to balance the interests of employees and employers while promoting a fair and healthy work environment.
a. Industrial Disputes The guidelines and conditions in the Industrial Disputes Act of 1947 are used to settle disputes between 2 employees or employee-employers. This act promotes the resolution of disputes amicably in a labour court and helps maintain peace.
The Industrial Development Act (IDA) offers broad coverage for startups, but implementation of its rules and requirements include startup size, employee strength, and nature of work.
Failure to comply with the settlement awarded by the labour court can cause the individuals to be prosecuted as per Section 29 of this act.
b. Minimum Wage The Minimum Wages Act of 1948 is meant to regulate and supervise the assurance of the minimum wage to every employee. The minimum wages are decided at the national, state, or district level. It may also be influenced by the occupation and cost of living of the region where the startup operates.
This act ensures that the employees are not exploited, and for this, the employers are supposed to maintain payslips or a record of the wages paid. Failure to comply can result in penalties ranging from 100% to 200% of the underpaid amount. Mysa offers payroll statutory compliance services for Indian companies.
Working as a startup payroll advisor, we assist you in establishing a payroll system through Zoho Books and staying updated with the regulations.
Read our recent article on Best Payroll services and Payroll software in 2024
c. PF and ESI The Employees’ Provident Fund & Miscellaneous Provisions (Amendment) Act, 1992 implements social welfare and employee security measures. It asks companies with over 20 employees to contribute the same amount towards the employee provident fund. You must follow the set formula to calculate the PF amount for every employee and make the contributions along with the salary cycle.
Provident Fund Calculation
Employees Contribute 12% of their basic salary plus DA. Out of this, 8.33% is credited to the Employee Pension Plan, and 3.67% goes to the Provident Fund. Employers also contribute 12% of the basic salary plus DA, which is credited to the Employees’ Provident Fund account.
Employers not following this rule must pay a penalty of up to ₹10,000 and face imprisonment of up to 3 years. In addition to PF, the Employees’ State Insurance Act of 1948 ensures medical benefits to the employees registered at the regional ESI establishment. Companies with more than 20 employees are required to register their employees as per the guidelines.
d. Maternity and Paternity Leave Using the guidelines of the Maternity Benefit Act of 1961, women employees are granted maternity leave and medical benefits at the time of pregnancy.
The pregnant employees can claim paid leave for a period of 26 weeks, and a work-from-home provision has also been added. The employees can combine the WFH period after their 26 weeks of paid leave expires.
Non-compliance with the stated rules, if appealed and found relevant, can lead the employer to imprisonment of 3 to 12 months.
e. Sexual Harassment at Workplace Under this law enacted in 2013, employers must implement mechanisms to prevent sexual harassment incidents at the workplace and address them with diligence and fairness.
Companies with over 10 employees must form an Internal Complaints Committee (ICC) to investigate sexual harassment complaints. The ICC can give a verbal or written warning, transfer, suspend, or terminate the accused.
Non-compliance results in a fine of up to ₹50,000 for not forming the ICC, and additional fines will be imposed for additional non-compliance. The aggrieved employees can also take legal action against the accused individual.
If not handled swiftly, sexual harassment incidents in companies can also become public news, damaging the company’s reputation and brand image.
f. Safety and Health at Workplace This statutory compliance operates under the Factories Act of 1948, sharing guidelines to ensure the safety of the employees. The safety guidelines apply to all mines, factories, construction sites, and offices. The law and its rules are meant to prevent occupational accidents, injuries, and diseases.
Recognising the well-being of employees through safety measures and health initiatives is a cornerstone for your company’s success. In addition to providing the required first aid, the companies must conduct safety assessments and train employees to build a safe work culture.
Not following the rules under this law can lead to financial penalties and legal action, leading to imprisonment for negligence as an employer.
g. Gratuity Laws The Payment of Gratuity Rules of 1972 governs startups with more than 10 employees and is meant to provide financial security to the employees. A set amount is deducted from the employee’s monthly wages and returned to them after they complete five years of working with the organisation.
Contravention of the gratuity rules can result in imprisonment of up to 2 years or a fine of up to ₹20,000 or both.
h. Equal Remuneration Act, 1976 To encourage gender equality, companies at all stages of growth must provide equal pay to male and female employees. An important benefit is to prevent discrimination against women and their economic empowerment.
It's prohibited to lower the wages for women compared to men when both work the same job.
Not following the rules invites a fine equal to the underpaid amount and additional fines plus imprisonment in extreme negligence and wilful disobedience cases.
In this, minimum wages, equal remuneration, gratuity requirements, and tax regulations are also implemented as a part of the payroll statutory compliance. HR professionals can help you navigate the complex wage- or salary-related compliance structure. By utilising a comprehensive statutory compliance checklist for HR prepared by our experts, you can streamline processes and track deadlines to ensure adherence.
Industrial Disputes: Implement measures to resolve disputes between employees or employer-employees.Minimum Wage: Ensuring employees are paid the minimum wage.PF & ESI: Employee Provident Fund and Employee State Insurance contributions.Maternity/Paternity Leave: Providing paid leave for pregnancy and childbirth.Sexual Harassment: Preventing and addressing sexual harassment at the workplace.Workplace Safety: Ensuring safe working conditionsGratuity: Providing financial security to employees after a certain service period.Equal Remuneration: Providing equal pay for equal work, regardless of genderAdditional Statutory Compliances 1. Data Privacy According to the Digital Personal Data Protection Act of 2023 and the IT Act of 2000, companies must implement measures to protect employees’ and customers’ data. Preventing unauthorised access, utilisation, and unwanted disclosure can lead to reputational damages, fines, and legal proceedings.
2. IP Protection For IP protection, startups must account for four regulations: The Patents Act of 1970, the Trade Marks Act of 1999, the Designs Act of 2000, and the Copyright Act of 1957.
While the startups get protection under the law, they can also be prosecuted if they do not abide by the laws. These regulations safeguard inventions, trademarks, and designs, preventing plagiarism.
3. Environmental Compliances These regulations come under various legislations, including the Factories Act, 1948; Environment Protection Act, 1986; Air (Prevention and Control of Pollution) Act, 1981; Water (Prevention and Control of Pollution) Act, 1974; Hazardous Waste (Management, Handling and Transboundary Movement) Rules, 2016, and the Companies Act, 2013.
Non-compliance with the set rules invites hefty fines, licence suspensions, and even shutdowns.
Understanding all the laws and regulations under the startup annual compliance checklist is essential to pivot your company in the right direction. Here are the ways to make statutory compliance easier for your startup.
How to Make Statutory Compliance Easier Follow these three ways to complete your statutory compliance checklist without interruptions.
Investigate and Audit Regularly: Stay updated with the changes in regulations and laws while checking your compliance through regular audits. You can source information from updated compliance trends and reports to ascertain your compliance readiness in all areas. Prepare a Compliance Plan: Set due dates for all the applicable statutory compliances and set a tracker. Conduct company procedure and process reviews to align your operations with the ideal norms. A plan will help optimise costs, save time, and prevent unwanted results. Hire Professionals: Compliance experts can help your startup stay up-to-date with all the regulations. While these experts may be counted as an expense startups can avoid, you cannot ignore staying compliant with the law of the land. A cost-efficient statutory compliance solution is hiring Mysa. We can automate the applicable compliances and protect you from unwanted fines and reputational damage.
How Mysa can help you mitigate compliance risks Ensuring statutory compliance for early-stage companies is a daunting task. Time synchronous updates in the regulations make it challenging for the startups to implement the changes, especially when their primary focus is business growth.
With Mysa, startup founders and managers can be at ease as we take care of the following;
Automated tax payouts Audit support and secretariat compliances. Access to updated information on statutory compliances. Zoho Books integration for account management Payroll payouts on autopilot Answering employee queries related to salary structure, taxation, and deductions. To help you with it, we have prepared the statutory compliance checklist for HR, finance managers, founders, and CEOs. Follow our checklist to know all the necessary compliances.
Stay updated with all your compliances, stay protected, and ensure smooth operations with Mysa. Contact us to know more.
Frequently Asked Questions About Statutory Compliance 1. What is statutory compliance and why is it important for startups? Statutory compliance is the legal framework requiring businesses to follow government-mandated regulations covering taxation, labour laws, industrial relations, data privacy, and environmental norms.
Why it's critical for startups:
Legal protection: Prevents penalties, fines, and business closureInvestor confidence: Demonstrates operational maturity and governanceEmployee trust: Ensures fair treatment, safety, and timely benefitsReputation management: Builds credibility with customers, partners, and regulatorsSustainable growth: Creates foundation for long-term business expansion2. What are the main types of statutory compliance in India? Four key compliance areas:
1. Tax Compliances:
Direct taxes: Income Tax, TDS (governed by Income Tax Act, 1961) Indirect taxes: GST registration and filing (101st Constitution Amendment Act, 2016) Investor taxation: Angel tax under Section 56(2)(viib) Foreign company taxation: Corporate tax + GST 2. Labour Laws:
Industrial Disputes Act, 1947: Dispute resolution Minimum Wages Act, 1948: Wage regulation Employees' Provident Fund Act, 1952: PF contributions (20+ employees) Employees' State Insurance Act, 1948: ESI benefits (20+ employees) Maternity Benefit Act, 1961: 26 weeks paid leave Sexual Harassment Act, 2013: ICC formation (10+ employees) Factories Act, 1948: Workplace safety Payment of Gratuity Act, 1972: 5+ years service benefit Equal Remuneration Act, 1976: Gender pay equality 3. Industrial Relations:
Fixed working hours, overtime policies Leave management and social security Prevention of workplace discrimination 4. Additional Compliances:
Data Privacy: Digital Personal Data Protection Act, 2023; IT Act, 2000 IP Protection: Patents, Trademarks, Designs, Copyright Acts Environmental: Environment Protection Act, 1986; Air/Water Pollution Acts 3. How do I know which statutory compliances apply to my startup? Compliance applicability depends on:
Company structure:
Sole proprietorship: Basic tax, minimal labour laws Partnership/LLP: Tax + moderate labour compliance Private Limited: Full tax, labour, corporate governance compliance Employee strength thresholds:
1-9 employees: Basic tax, minimum wage, equal remuneration 10-19 employees: + Sexual Harassment Act (ICC required) 20+ employees: + PF, ESI mandatory 50+ employees: Enhanced labour law scrutiny Revenue thresholds:
< ₹40 lakh: GST optional ₹40 lakh+ (goods) / ₹20 lakh+ (services): GST mandatory ₹1 crore+: Statutory audit required ₹5 crore+: Financial Controller recommended Industry-specific:
Manufacturing: Environmental clearances, Factories Act E-commerce: Data privacy, consumer protection Fintech: RBI regulations, KYC, AML Healthcare: Clinical Establishments Act, drug licenses Pro tip: Conduct compliance audit at 10, 20, 50 employee milestones and revenue thresholds.
4. What is the typical cost of statutory compliance for startups in India? Cost breakdown by stage:
Early-stage (0-10 employees, < ₹1 crore revenue):
Basic GST filing: ₹5,000-₹15,000/year Income tax filing: ₹10,000-₹20,000/year Basic labour compliance: ₹5,000-₹10,000/year Total: ₹20,000-₹45,000/yearGrowth stage (10-50 employees, ₹1-5 crore revenue):
GST + TDS compliance: ₹30,000-₹60,000/year Statutory audit: ₹50,000-₹1,00,000/year PF/ESI registration + filing: ₹20,000-₹40,000/year Labour compliance (maternity, gratuity): ₹30,000-₹50,000/year Total: ₹1,30,000-₹2,50,000/yearScale stage (50+ employees, ₹5+ crore revenue):
Full tax compliance: ₹1,00,000-₹2,00,000/year Comprehensive labour compliance: ₹1,50,000-₹3,00,000/year Environmental/IP compliance: ₹50,000-₹1,00,000/year In-house compliance team: ₹40,000-₹80,000/month per person Total: ₹5,00,000-₹12,00,000/yearHidden costs:
Late filing penalties: ₹10,000-₹2,00,000 per violation Non-compliance fines: Up to ₹50,000 per violation Legal fees for disputes: ₹50,000-₹5,00,000+ Cost-effective solution: Automated compliance platforms like Mysa reduce costs by 40-60% through automation and expert guidance.
5. What are the consequences of non-compliance? Financial penalties:
GST late filing: ₹20,000-₹50,000 per return + interest PF non-compliance: 100-200% of underpaid amount Sexual Harassment Act: ₹50,000 for not forming ICC Minimum Wage violation: 100-200% of underpaid wages Gratuity non-payment: Up to ₹20,000 Legal repercussions:
Income tax default: Imprisonment up to 3-7 years TDS non-compliance: Imprisonment up to 3 years Labour law violations: Imprisonment 3 months-3 years Sexual Harassment negligence: Additional prosecution Environmental violations: Business closure, license suspension Reputational damage:
Loss of investor confidence and funding opportunities Customer trust erosion and negative PR Difficulty hiring talent due to poor employer brand Delisting from government schemes (Startup India benefits) Marketplace bans (Amazon, Flipkart, etc.) Operational disruptions:
Bank account freezing for tax defaults Business operations halt during legal proceedings Management time diverted to compliance resolution Real example: Konwert India Motors Private Limited penalized in 2023 for MGT-14 filing default under Companies Act.
6. What documents do I need to maintain for statutory compliance? Tax compliance documents:
PAN, TAN, GST registration certificates GST invoices and bills (preserve 6+ years) TDS certificates (Form 16, 16A) Income tax returns (ITR) for last 7 years Audit reports (if applicable) Labour compliance documents:
Employee contracts and appointment letters Salary registers and payslips (all employees) Attendance records, leave registers PF/ESI registration certificates PF/ESI monthly returns and challan receipts Bonus, gratuity records Form 16 for all employees Maternity leave applications and approvals Sexual Harassment (ICC) records and annual reports Corporate governance documents:
Certificate of Incorporation Memorandum and Articles of Association (MoA/AoA) Board meeting minutes Shareholder agreements Annual returns (Form MGT-7) Financial statements Statutory audit reports Industry-specific documents:
Environmental clearance certificates Trade licenses and shop establishment registrations FSSAI license (food businesses) Drug licenses (pharma/healthcare) Data privacy policies and consent records Document retention period: Minimum 7 years for tax, 5 years for labour records, permanent for incorporation documents.
Pro tip: Use cloud-based document management systems (Mysa integrates document storage) to organize and retrieve compliance documents instantly during audits.
7. What are the most common statutory compliance mistakes startups make? 1. Delayed GST registration:
Penalty: Operating illegally, unable to claim input tax credit Fix: Register within 30 days of crossing ₹40 lakh (goods) / ₹20 lakh (services) 2. Missing PF/ESI registration:
Penalty: ₹10,000 fine + 3 years imprisonment Fix: Register immediately upon crossing 20 employees threshold 3. Incorrect TDS deduction and filing:
Penalty: 1% interest per month on unpaid TDS Fix: Use TDS calculator, file quarterly returns on time 4. Not forming Internal Complaints Committee (ICC):
Penalty: ₹50,000 fine under Sexual Harassment Act Fix: Form ICC immediately upon hiring 10th employee 5. Mixing personal and business finances:
Penalty: Tax scrutiny, audit issues, credibility loss Fix: Open dedicated business current account from day 1 6. Ignoring DPIIT Startup India registration:
Penalty: Missing tax holidays, angel tax exemptions, IPR benefits Fix: Apply for DPIIT recognition if startup < 10 years, revenue < ₹100 crore 7. Non-compliance with maternity leave:
Penalty: 3-12 months imprisonment Fix: Implement 26-week paid maternity leave policy 8. Late annual return filing (MGT-7, AOC-4):
Penalty: ₹100/day for company + ₹100/day for director Fix: File by November 29 (within 60 days of AGM) 8. How can I automate and streamline statutory compliance? Automation strategies:
1. Use integrated compliance software:
Platforms like Mysa, Zoho Books, QuickBooks automate GST, TDS, PF/ESI Auto-generate invoices, file returns, track deadlines Cost savings: 40-60% reduction in compliance costs 2. Implement payroll automation:
Auto-calculate PF, ESI, TDS deductions Generate Form 16, salary slips automatically Ensure minimum wage, overtime compliance 3. Set compliance calendar and alerts:
Monthly: GST filing (10th, 20th), TDS payment (7th) Quarterly: TDS returns, PF/ESI returns Annual: Income tax, audit, annual returns Use tools: Google Calendar, Zoho Projects, Mysa dashboard 4. Centralize document management:
Cloud storage (Google Drive, Dropbox) for all compliance documents Organize by compliance type, year, employee Quick retrieval during audits 5. Hire fractional compliance experts:
Part-time CA, CS for quarterly reviews (₹10,000-₹30,000/month) Annual audit CA (₹50,000-₹1,00,000) Legal counsel for IP, labour disputes (retainer ₹20,000-₹50,000/month) 6. Leverage government portals:
Startup India portal for DPIIT registration, benefits GST portal for filing, tracking EPFO portal for PF compliance ESIC portal for ESI management 7. Conduct quarterly compliance audits:
Internal review every quarter Identify gaps, rectify immediately Prepare for annual statutory audit Mysa advantage:
Automated tax payouts and GST filing Real-time compliance dashboard Audit support and secretariat services Zoho Books integration for seamless accounting Payroll automation with statutory deductions Expert guidance on changing regulations Time savings: Automation reduces compliance management time by 70%, freeing founders to focus on growth.
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