Be compliant with these basic laws to kickstart your startup
KPMG research shows that startups in India have seen a steady rise by seven times in the last decade. This is attributed to a slew of favorable government laws and initiatives in India. As a result, India’s image has grown by leaps and bounds as a startup-friendly country.
Hence, if you are an aspiring startup or a new startup, make sure that you comply with certain startup laws and regulations for the smooth running of your startup in India. Interestingly, India has a number of laws for startups ranging from contract laws, incorporation laws, patent laws, taxation laws, etc.
In this blog, I will talk about the core startup laws in India in a simplified fashion.
1. Limited Liability Partnership Act, 2008
Limited Liability Partnership Act, 2008 governs the formation of Limited liability partnership firms in India. Startups registered as LLPs have the flexibility of entering into contracts, hold properties, etc irrespective of the subsequent change in the partners involved.
Provisions of the Limited Liability Partnership Act, 2008:
- LLP Agreement: It is not mandatory to have an LLP agreement. This reduces the technicalities involved, thereby easing the working of a startup.
- Penalty: Violation of this Act results in a penalty of a maximum of five lakhs and a minimum of five thousand rupees.
- Audits and accounts: Audit of accounts of the LLP is mandatory if turnover exceeds 40 lakhs or contribution by partner exceeds by 25 lakhs.
2. Companies Act, 2013
Companies Act, 2017 is the fundamental law for the formation, functioning, regulation, and dissolution of a company. It clearly sets out the responsibilities for different stakeholders of a company like directors, major shareholders, minor shareholders, etc.
Important provisions of Companies Act, 2013 are:
- One person company: The new provision allows any company to be solely led by one person ( as both the director and the shareholder).
- Shareholders: Maximum shareholders in a company could go up to a maximum of 200.
- Women director: The Act provides for the mandatory appointment of a minimum of one woman board director.
- Corporate Social responsibility: Every company which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the preceding three financial years on corporate social responsibility activities.
3. Competition Act, 2002
Competition Act, 2002 governs the competitive activities of different organizations in the Indian market scenario. It ensures fair play in the Indian market by keeping a check on anti-competitive activities by the different players.
Key provisions of the Competition Act, 2002 are:
- Competition Commission Of India: It is the central regulator for monitoring and keeping a check on anti-competitive practices in India.
- Penalty: CCI can enforce a penalty of up to 1 lakh on any company for anti-competitive practices.
- Appeal: Appeal against CCI’s decision can be made by the aggrieved party within sixty days of the judgment in the Supreme Court of India.
4. Insolvency and Bankruptcy Code, 2016
Insolvency and Bankruptcy Code, 2016 aims to create a unified system for dispute resolution in India. It speeds up the dispute resolution process with the help of independent institutions and functionaries. In the past, dispute resolution in India was plagued by issues like red-tapism, organizational inefficiency, etc. Insolvency and Bankruptcy Code, 2016 intends to correct this loophole.
The provisions of Insolvency and Bankruptcy Code, 2016 are:
- Dispute resolution time: Dispute resolution varies for corporates as well as individuals. The time frame is 180 days, extendable by 90 days for companies. For startups, the time frame is 90 days extendable by 45 days.
- Dispute resolution request: Dispute resolution request can be put forth both by creditors as well as debtors.
- Insolvency and Bankruptcy Board of India: IBBI is the insolvency regulator overseeing dispute resolution throughout the country. The board consists of 10 members including representatives from the Ministry of Finance, Law, and RBI.
- Adjudicatory process: National Company Law Tribunal adjudicates in case of company and LLP firms. Individual and partnership firm related adjudication handled by Debt Recovery Tribunals.
5. Goods and Services Tax Act, 2016
GST Act aims to bring in a single, common taxation regime in the country by combining both central and state government taxes. It comes with the benefits of avoiding double taxation, lowering the prices of commodities and bringing in a competitive market.
Provisions of Goods and Services tax are:
- GST slabs: The GST system currently has four slabs — 5%, 12%, 18%, and 28%. This simplifies the multiple taxes under the VAT system.
- Central GST and State GST: Central GST to be levied and collected by the central government and State GST to be levied and collected by the state government.
- Integrated GST: Integrated GST to be levied and collected by the Central government in case of inter-state transactions.
- GST Council: GST Council is the governing body for revision of GST on a periodic basis.
- Beneficial clause for Startups: By availing the input tax credit, startups can offset the regressive effects of the VAT system.
6. Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015
This act deals with the resolution of commercial disputes. Accordingly, commercial courts and commercial divisions of the high court can adjudicate on commercial disputes with a value of at least 3 lakhs.
It’s salient features include:
- Commercial courts: Commercial courts to be established at the district level and also in the territories with the high court’s primary jurisdiction.
- Commercial appellate courts: Commercial appellate courts are set up in the areas where original jurisdiction of the high court is non-applicable.
- Mandatory mediation: Compulsory mediation provided in cases where there is no need for urgent relief.
7. Arbitration and Conciliation Act, 2015
Arbitration and Conciliation Act, 2015 deals with the arbitration of commercial disputes in an institutional fashion. Further, the act aims to make the arbitration process more cost-effective and client-friendly.
The salient features of the Arbitration and Conciliation Act, 2015 are:
- Arbitral institutions: Supreme Court and High Courts to create arbitral institutions for dispute resolution, that can be directly approached by the parties for dispute resolution.
- Arbitral award time: Arbitral award to be given within twelve months period, which could be extended by another six months.
- Arbitration Council of India: Lays down norms for grading arbitral institutions and ensuring an environment of alternate dispute resolution (ADR).
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