How to start a software company in India
India has become a hub for software development and IT enabled services globally over the years. The opportunities for Indian entities in the IT sector have further increased due to “Make in India” & “Start-up” initiatives of the Government of India. Not only the big companies like TCS, Tech Mahindra, L&T Infotech, Infosys are known globally for their excellence in the IT sector but a numerous small software companies are also emerging and growing faster in this sector. Many cities like Bangalore, Pune, Chandigarh, Jaipur, Mumbai, Gurgaon etc. has emerged as IT cities in India. Every young IT professional boasting to become entrepreneur might be interested in knowing the answer to the question “How to start a software company in India”. If yes, here is the answer...
Table of Contents:
Choosing suitable business form & incorporation
GST Registration & Letter of Undertaking
Shop & Establishment Registration
Employee Provident Fund (EPF) and Employees’ State Insurance (ESIC) Registration
Choosing suitable business form & incorporation
When you are planning to register a software company in India, you first need to choose a suitable form of business entity. There are several options for you to form a software company. The most common and popular options are Private Limited Company, Limited Liability Partnership, One Person Company, Partnership and Proprietorship. Each option has their own merits and demerits so a careful analysis should be made based on your requirements to choose the best option of business form.
A private limited company carries benefits in the form of separate legal existence, limited liability of owners, relaxations in obtaining foreign remittance, lower income tax rates. This makes private limited company registration as one of most popular choice for starting a software company in India.
On the other hand, A limited liability partnership (LLP) is also preferred by many entrepreneurs as it has lesser statutory compliances as compared to a private limited company and still carries benefits like limited liability of partners. You can read more about LLP click on: Limited Liability Partnership Registration
Obtain PAN & TAN
PAN stands for Permanent Account Number & TAN stands for Tax Deduction & Collection Account Number. Both PAN & TAN are issued by the Income Tax Department in India.
PAN represents unique identification number for every taxpayer in India and is used for filing income tax returns and various income tax forms. So, it is most important to obtain PAN. If you forming a company or a LLP, the Ministry of Corporate Affairs (MCA) will issue PAN & TAN while issuing incorporation certificate.
Business entities are required to deduct and collect tax while making payments to their employees, vendors, suppliers and contractors as per the provisions of the Income Tax Act, 1961. Tax so deducted or collected by the business entity is deposited through TAN. The application for TAN & PAN is made to MCA while applying for incorporation.
Professional Tax Registration
Professional Tax is a state matter in India. It means that the Constitution of India gives the right to states to levy professional tax. This is the reason professional tax is not universal in every state in India. However, if you are starting a company in the states like Maharashtra or Karnataka, you must apply for professional tax registration and make timely compliances. It is a direct tax which every employer needs to deduct from the gross salary of the employees and deposit with the local authorities. Read more about professional tax registration at this link: How to get Professional Tax Registration
GST Registration & Letter of Undertaking
GST Registration
Goods & Service Tax (GST) is applicable in India on supply of goods or services. IT services and software development are also liable for GST in India. It is mandatory to register for GST in case of turnover exceeding INR 20 Lakhs in case of service providers. In case of export of services, GST registration is compulsory without any minimum threshold limit. So, if you are intending to start a software company, you should apply for GST registration as most of the software companies in India are catering to foreign clients.
Letter of Undertaking (LUT)
A large number of software development and IT companies in India are catering to foreign clients which is treated as “export of services” under GST. Export of services are not liable for payment of GST. However, there is a requirement to file a “Letter of Undertaking” (LUT) on GST portal in the Form GST RFD 11.
LUT is a declaration to be filed by an exporter that it fulfils requirements of GST Act for export of goods without payment of IGST. It is important to note that LUT could be filed on GST portal only & that’s why you need to obtain GST registration first to be eligible to file LUT.
Shop & Establishment Registration
Shop & Establishment Registration is a registration of business with local authorities. The labour department in every state has been empowered to administer Shop & Establishment Registration in their respective states. Every state in India has their distinct rules for Shop & Establishment Registration.
In some states, you can apply for life-time registration whereas in some states, the registration is granted for 1-5 years. This registration is required for all businesses irrespective of their nature & size.
Employee Provident Fund (EPF) and Employees’ State Insurance (ESIC) Registration
Ministry of Labour and Employment, Government of India governs PF and ESI in India. Any business entity with 20 or more employees is required to register for the PF. Similarly, any business entity with 10 or more employees are mandated for an ESI registration. Therefore, if you are intending to start a software company, you should keep this threshold limit in mind. It is also important to note that EPF registration & ESI registration is given by MCA while incorporating company or an LLP.
Other Registrations
Udyam Registration (MSME Registration)
MSME means micro, small and medium enterprises. MSME registration is meant to promote and safeguard the interests of small business entities running in India. MSME registration also known as Udyam Registration is granted by Ministry of Micro, Small and Medium Enterprises, Government of India. A business entity registered as MSME can take benefits of various Central Government schemes such as Mudra loans, interest subsidies, subsidies on trademark and patent registrations, GEM portal registration allowing preference in Government tenders etc.
Start-up India Registration (DPIIT)
It is a scheme of Central Government under the supervision of the Ministry of Commerce and Industry which is intended to promote innovation and entrepreneurship in India. A new start-up can register under Start-up India program and avail various benefits including start-up funding & grants, Income Tax exemptions, Angel Tax Exemptions etc. If you are a start-up in the field of software or IT, you should definitely apply for start-up registration.
In addition to above registrations, you might also be interested in obtaining trademark registration which is meant to protect your brand identity. Having a registered trademark saves you from the risk of misuse of your brand name, logo, product name etc.
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About Taxwink
We are a leading corporate & taxation consultant firm in India having a team of experienced professionals catering various needs of business entities in India. We are providing expert services in company & LLP incorporation, GST registration & compliances, Income tax compliances, accounting services. Our motto is helping you focus on your business growth by taking up your compliance burden on our shoulders with highly efficient and timely services.
