Running/starting a business - frequently asked questions

Q. What will be the tax structure for a sole proprietorship?
A. As a proprietor, you will create a profit-and-loss account of your business. Here you have the advantage of putting in a lot of your business/personal expenses into the P&L account. This should ideally be avoided as you grow, but initially you can reduce your tax burden with this. The tax you will end up paying is only on the *profit* of your business, and not on all the income. If you accept income directly on your name, you will have to end up paying tax on all the income. So proprietorship is the smarter choice.

The other tax component you need to be aware of is Service Tax. If your revenues exceed Rs. 8 lakhs per year, you are liable to pay Service Tax every quarter at the rate of 12.36% on the income. For this you will need to obtain a Service Tax number by registering yourself at the local excise office. This is for services. If you are going to be selling products, you need to register for Sales Tax or VAT (depends on the rules in your particular state). For this as well you need to check with your local excise officer. More information on Service/Sales tax is available here
http://cexmumbai3.gov.in/


Q. How do I start from scratch?
A. Good to hear that you're looking at becoming an entrepreneur. There are basically two approaches to starting your company:
1. You could plan, map your strengths, product offering, and then see whether there is a market need for it, what resources you would need, how much funding you would need, and then build all of this into a business plan.
2. You could jump right into the deep end of the pool, and follow a 'shoot-from-the-hip' kind of cowboy style of doing things

I adopted approach #2, but wouldn't always advise it. The important common points in either approach are:
1. You have to offer something that the market will pay you for
2. It has to be something you would love doing irrespective of how much you get paid for it

The current economic and business situation is such that you could start off on an experimental basis while you are still working. And then you could quit and begin full time. I was slightly advantaged because I started at 20-21 and didn't have a family to support. Those sorts of things add responsibilities and must be duly addressed.

I started my company with a Rs. 2 lakh capital, and built it into a 100 times that in about 6 years. My blog does contain posts on how to start your business from scratch. Take a look and see if it helps.

Q. Can you tell me if VAT and Service Tax are applicable for freelance software solutions provided locally and for abroad?
A. Service Tax, yes, only if your annual turnover exceeds Rs. 8 lakhs
VAT would be applicable only if you resell other software products, or you have built your own products.

Q. Do I need a PAN card for a proprietorship firm?
A. No, you can use your personal PAN number. A separate PAN will be required only if you have incorporate it as a Pvt. Ltd. firm. Approach the nearest Income Tax office and get in touch with the PRO (Public Relations Officer) for details.

Q. Do I need to register for Service Tax or VAT?
A. Service Tax, yes, only if your annual turnover exceeds Rs. 8 lakhs
VAT would be applicable only if you resell other software products, or you have built your own products.

Q. Where do I get my seed capital from?
A. As to your funding requirement, I suggest you first list out exactly how much money you need, for how many months, how you intend to earn revenues, how much revenues you are targeting on a monthly basis vs. your monthly expenses to run the company. Basically, try and build a rudimentary profit-and-loss sheet, and see where your break-even point is. How do you intend to pay back the entity who loans you the money.

Taking money from friends/relatives may sound easy, but it isn't always so. What if your venture doesn't succeed as much you had planned. You will damage the relationships also. But if it is a small sum, and you are confident of returning it, then this is the best option. Banks will ask for collateral to give you a loan, and this might be difficult, unless you mortgage some family property or other assets you have.

But first come up with the exact amount of money you need and then try and figure out your sources of funding.

Q. I am currently working at a Pvt Ltd Co. and am starting my own propreitorship firm from my home. Its a services business where I would be launching my first portal soon. I have acquired a gumaste license. Kindly inform me about the other requirements specially relating to taxes. Do I need a seperate pancard for the firm and besides registering for the service tax which other taxes do i have to pay?
A. If you are running it as a sole proprietorship, you can continue using your personal PAN number. For purposes of tax calculation, you need to prepare a profit-and-loss account for the proprietorship firm, and then include only the profit (if any) into your total taxable income computation. But if you incorporate it as a Pvt. Ltd. firm then you need an additional PAN card.

Besides service tax, if you have employees you would have to pay Fringe Benefit Tax on the benefits you provide to your employees (such as travel, food, conveyance, entertainment, petrol diesel, etc.). You also need to register for Professional Tax for your proprietorship firm. If you sell or resell any products, you would also need to register for VAT or Sales Tax. If you have employees, you need to deduct tax at source, and for this you need to register for a TAN number.

Please check with a professional CA and CS (Company Secretary) for the latest laws and regulations in this regard.


Q. Can I have a current account (as the sole Prop) in my name but have an operational business name for website/visiting cards etc. Is it mandatory to have the name registered?
A. Your clients will know you by the name being used on your website and visiting cards. But then when you bill them or ask them to make a payment, it will be a different name. This will create a slightly negative impression in their minds. It is best to focus on brand-building right from the start.

How to register for Sales Tax / VAT in India

Recently, we got into reselling products in line with our consulting work, and also developed a couple of new products. But in order to sell products within India, we need to register for a Sales Tax or VAT (Value-Added Tax) number. This process is pretty straightforward:

1. Locate the office of the Central Sales Tax Office in your city. Being in Mumbai, a simple Google search turned up the location of the office at Mazgaon - http://salestax.maharashtra.gov.in/communicationcenter/contactusShow.php
2. Approach either the Public Relations Officer's desk there, or go directly to the Registration Department and collect the forms.
3. We needed the following supporting documentation along with the form:
• Company's PAN Card
• Director's PAN Card copy
• Two proofs of Director's residence - I used my passport and a phone bill
• Two proofs of place of business - we used our Leave & License agreement, and the electricity bill
4. The form is pretty straightforward to fill, and you need to ask for the one related to Voluntary Registration (VRS). You will need a Sales Tax Professional to sign on the form, and the Mazgaon building also houses the central office of the Association of Sales Tax Professionals, so finding one shouldn't be all that difficult.
   
5. It cost us Rs. 5000 as fees for VRS, and nothing under-the-table
6. The Sales Tax or VAT number is sent across by post in about a week's time

The main thing to keep in mind is that VAT returns need to be filed every quarter, and you will need to get a qualified CA who is capable of auditing and signing-off on VAT returns. My current CA has expressed his reluctance to process our VAT returns, so we are on the lookout now for someone who can do this.