This is the Current State Of Processes Around It!

I recently started working on a foreign software development contract. It seems that to ‘earn’ via such a contract, you need to have a business entity of sorts. I had to undergo a long, painful process riddled with unknowns and uncertainties to establish one and raise my invoices. Here is a brief of my understanding of the process and various norms and laws. I do not claim that the material below is correct, it is only how I understood it and would recommend you to not follow this blindly. You should, as I have, take help of professionals in this area (Chartered Accountants or CA, Company Secretary or CS and lawyers) before you proceed and form your own understanding. This is write up is merely a record of things I went through.

GST and stuff

• First things first, link your mobile number (and email id) to Aadhaar number. By the way, linking your aadhaar to mobile and mobile to aadhaar are two different things. First keeps your mobile working. Second allows your to verify your Aadhaar number when asked for. Those who have registered for Aadhaar in the recent times, might already have their number linked. You can verify this on the Aadhaar portal. This currently is a big pain as all the private e-Seva Kendra are closed and government centres are flooded. Solutions:
  • Get in a queue at a bank or post office where they are still modifying Aadhaar at about 5 am on a Monday to get your appointment for modification. You have to then be present with all (don’t know which all) possible documents at the time and date of your appointment to get the modifications done. Else, get a new token by standing in queue.
  • Go to a remote village’s regional office to get it modified.
• Register your business. In any way possible, but do register. Proprietorship is probably the easiest way to go forward, in a proprietorship, you and the business are the same entities and are inter-changeable.
  • It is good to name the business. Even if you name it as your name, i.e “Nikhil Wanpal” in my case. CA/CS would suggest to add something like “& co” or “& associates” etc in the name for clarity and avoiding confusion in legal matters. But this will bite us back when opening current account. If you decide to go for a proprietorship, here are the documents required:
    • Self signed copy of pan and Aadhaar of owner of business
    • Copy of latest electricity bill of premises
    • Copy of NOC for use of premises
    • Photo of name plate along with owner (Of course we cannot create a board, so take print out paste on your home door and take your photo in front of it)
    • Mobile no and email ID
    • Brief business activity
  • Many other forms exist: OPC, Partnership, LLP and pvt ltd. Choose one with least hassles. All other forms, either require another person to be part of the business and hence a dependency or else require a repetitive documentation to be maintained like BOD meeting MOMs. Also, when your business is a separate entity, you have a separate PAN and you need to be extra careful when making transactions, even by mistake, making a business transaction with your personal card (or vise a versa), linked to your personal PAN can be an issue. You need to ensure you carefully use correct cards for correct type of expenses. This is not an issue for larger organisations where there are people managing purchases and granting expense claims, but for a single person working, to me, this seemed like an unnecessary hassle.
• Get your Shop Act License. This step is same as above, basically, a shop act is how you register a proprietorship. Shop act license is a license from government to perform business, and is ideal for shops/merchants and works well for us as small businesses as well. There were amendments to this license, in Dec 2017. The portal to avail the license was closed till 22 Feb, 18 for modifications. And when the portal opened, it opened with a new format of the license. Under the new act, a shop with less than 9 employees does not need the license, if you apply it does not need verification, nor does it need renewal of license. This is a good change for us, but is a pain since it is not yet propagated through the system.
• Get your rubber stamps. Required on almost all documents you sign. A designation/authority stamp, an address stamp and a round stamp are minimum of those required. Also, buy a blue/violet stamp-pad.
• Get your Udyog Aadhaar. This is a new self declaration of business required since Jan, 18. It is a supportive document for shop act license. Having a valid mobile number linked to your Aadhaar is mandatory to get this. In theory, this could ease your current account pains.
• Get your GSTIN. GST is mandatory for business in India, especially if your turnover is more than 20 lakh in a financial year. You have to file GST for every month, by 20th of next month. If you can get the name of the business in the GST, it can help simplify further processes. GSTIN and PAN are linked to entities, and in proprietorship there is only but one entity, you. So your GSTIN will be linked to your PAN. There is no easy way to get a GST number for your business, unless you go for a ‘Company’ registration. Apparently, there is a way to add a business name in your personal GST. But as it happens, what if I choose to open a another business? Or rename my existing business? GST modification is not on-line yet and requires physical document submission. I did not know this, I got GST way before shop act and so my certificate does not have the name of the proprietorship in it.
• Open a current account in the name of the business. Apparently, we, the IT professionals, do not fall under the group of professions that are allowed to do business using a savings account and hence a current account is mandatory, do not yet know of the implications. Now this part is tricky:
  • Shop act is no longer mandatory for business smaller than 9 employees, and hence the format is modified and no longer includes an expiry nor verification stamp.
  • Udyog Aadhaar is not a registration, but a self declaration (which is also what the new shop act has functionally become, given there is no verification).
  • Unfortunately, banks have not yet received a “Government Mandate” to use this shop act and hence this document is not considered as a legal / valid doc to open a current account. I have visited and inquired with these banks already, all would say they will open the current account, sure, but when you show them the shop act they will not recognise it and ask for a ‘real shop act’. List of banks I have visited: ICICI, Axis, SBI (they almost kicked me out), Saraswat cooperative bank, Maharashtra bank, Kotak Mahindra, PNB (total 7). A local cooperative bank was the only one that could recognise the new format and open a current account for me. (This issue may be limited to Maharashtra region)
  • In the last couple weeks, I have heard of HDFC bank offering a current account with a declaration from a practising CA along with other documents. I have not verified this.
  • From this step onward you need your stamps everywhere.
• Get a registered digital signature. Contact a Company Secretary who can get this for you. Go for longest term and both signing and encrypting capabilities. Format for IEC has changed, it is now an online document and does not have a physical stamp or signature. Officials may have to be convinced for this. Required Documents: Refer next point, documents list is inclusive of both.
• Get your IEC issued by DGFT. IEC stands for an Import-Export Code. We need this to make our export of software legal. To be able to get IEC, we need the digital signature and company name. IEC cannot be issued in the name of an individual. A CS can do this for you. It requires the form to be filled physically then submitted online and then offline, physically at their office. IEC requires a cancelled cheque in the name of the business, is the reason why you need a current account in the name of the business in the first place. Go for export permission for everything, because you can: manufacture, retail and service. Needs verification: Even if you do not fit the requirement to get GST, you still likely need to get IEC to make your export of software/service legal. Required Documents:
  • Photograph (3x3cms) of Applicant
  • Copy of PAN card and Aadhaar Card of applicant
  • Cancelled Cheque bearing the applicant Entity name, IFSC code
  • Mail ID and Contact no. of applicant
  • Copy of PAN Card of company, if applicable
  • Digital Signature of applicant with password
  • Copy of COI, MOA and AOA of Company, if applicable
  • Confirm any one of the business activity for IEC. (Merchant Cum Manufacturer Cum Service Provider)
• Get your LOU/LUT: Letter of Undertaking. (Officially called LUT on the GST portal) This says that you are doing an export and are not liable for any GST, and if you are you would pay it. This does not exempt you from filing GST, but the direct payment of it from your income. You still have to file your GSTs and declare expenses and GST you have paid. Unless you have LUT, you have to submit your income and pay (18%) GST on it. Then you can request a refund later, when you get your LUT. My CA was generous here and suggested I also grant him a letter of authority, so I would not have to go to the GST office stand in queue myself. It takes 2 days for Digital Certificate and 2-3 days for IEC to be generated. The process for LUT has changed and the submission is now online. The same documents above are to be scanned and uploaded to the portal. Also, there is no longer a physical document or any document provided for LUT. An acknowledgement number is generated when uploaded documents are accepted. This generation of acknowledgement number is considered as ‘acceptance’ and ‘grant/approval’ of LUT, and you Ack number itself is your LUT number. This is communicated via government circular (# 40/14/2018-GST) dated 6th April. This may be a hassle, if your client does not accept or is unaware of the new LUT process. In either case, you also need a LUT declaration on your invoices.You should not have any income in the duration from when you get your GST to the time you get your LUT, in other words, get . Required Documents:
  • Form No RFD-11 on firms letter head.
  • LUT on Rs 500/- stamp paper
  • Copy of GST registration certificate duly self attested.
  • Copy of Import Export Code certificate issued by DGFT.
  • Declaration on your letterhead that you are not liable for any contravention under GST act.
  • Copy of address proof of your entity duly self attested.
  • Copy of your PAN and address proof duly self attested
  • Authority letter in favour of CA on Rs 500/- stamp paper to represent on your behalf.

Pro-tip: Close your stamp pad and pack your stamps immediately after use, to avoid damaging your documents. 😉

Generating Invoices

Once you have all the docs setup, all income has to be justified with a GST Invoice letter, generated, signed, stamped and sent to the client on or before the date of payment. There are many formats floating around for GST invoices, there is also a government issued format, but there is nothing I could readily use. There are companies like Zoho who have an invoicing software with GST support. There are many other But I found it unnecessary when raising so few invoices for my purposes, I went with a Google Sheets, created a custom format which includes all the fields required in official government format and is more suited for our (IT) business.

Here is the link. Feel free to copy and use it for your own business purposes. I would love a shout-out if it helped though. 🙂

The invoice is marked with text where you need to modify and fill in values relevant to you, like your business name, client name, GSTIN etc. Follow the text steps in the invoice itself to get your own personal invoice. If you are billing hourly, you might want to fill in hours, minutes and hourly rate and use this formula in amount field:

=(SUM(F17*60+G17)/60)*H17

It converts the hours into minutes, adds the minutes, converts them back into hours in decimal and multiplies by hourly rate to calculate total amount. No other change should be required. When looking for SAC/HSN codes, I found 2 that could apply to regular IT development and have included them both in the template.

Filing Income Tax Returns

Someone might suggest you something apparently amazing to save tax, something called ‘presumptive tax’. In my view and understanding, there are a lot of practical issues with this scheme.

• Presumptive tax is a self declared expense/income from your turnover without being forced to audit your business.
• The allowed percent is 50% for an individual/proprietorship/professional. (8% for business)
• It means: you can self-declare 50% losses/expenses, without any documentation or computation of income or balance sheet and it would still be considered a legal tax filing under presumptive taxation. i.e. you would be liable for tax only on 50% of the income.
• You should actually have that much business expense. Using this scheme for invasion of tax is not advisable.

There may be people who would suggest otherwise and it might sound good. Here are some thoughts for those who intend to follow this route:

• You cannot use the extra money in any form. If you are found to have invested, say 1 lakh in a mutual fund and income tax office asks for an explanation say 5 years later, you would have no way to proving legal income.
• Say you falsely claimed 50% as a business expense, (and used it for personal expense) it would be illogical, since it is expected to have happened from the remaining 50% of your income.
• Say are doing nothing illegal, and your actual expense is 50%. This scheme is new, and hence there is little prior knowledge or cases to show what can be done to ‘escape’ from such inquiries if they happen and hence I (and my CA) are not in favour.
• Needs verification: This scheme locks you in for 5 years, i.e. you cannot change the way you show expense for 5 years once you opt for this.
• All banks and legal firms ask for balance sheet and computation of income of minimum 3 financial years (more on this below).
• That being said, you cannot get any loan for the next up to 8 (5+3) years since you have no (or not enough) balance sheets to show. You cannot keep a balance sheet or computation when filing under presumptive tax, as presumptive tax scheme exist to exempt you from having to maintain balance sheets. If you have balance sheets, which means you have kept books of accounts which means you cannot opt for presumptive tax.
• Under presumptive tax, even if a bank agrees to give you loan, it will be only on your 50% income.

I would rather show actual expenses and depreciation of business assets the traditional way. Well (Unfortunately) for us IT folks, the income is almost always via bank transfers, and the expenses are limited and again mostly via bank/card payments and so almost everything is anyways documented. It means I end up paying a lot more tax as opposed to filing under presumptive tax, but I am okay with it.

Some Points on Loan applications

As the situation was for me, I also had to apply for a loan. Ah, that in itself is a long story but some takeaways are:

• As a business person, you cannot get a loan unless you have been in business for a minimum of 3 years and the business has been ‘in business’ for 2 years.
• You need to present books of accounts, balance sheets, and computation of income for each business year of the last 3 years and the current year. The sheets and books for current year will be tentative, but that is still okay.
• Your income for granting loan is considered as ~70% of average of the last 3 years of income. Bank may add higher ‘safety’ margins on it as they see fit.
• If a bank grants you loan, you will always have a rate of interest at least 0.2% higher than the normal interest.

 

Again, iterating that the process and steps documented above are what I had to go through. There were a whole lot of unknowns and uncertainties that I had to go through to come to these conclusions and what you see above are the conclusions alone. One of the primary reason for the unknowns was that the processes had changed very recently, (I was almost always one of the first clients of the CA/CS/lawyers I was consulting since the change in process as if my timing matched with the changes!) causing uncertainties. But almost all the changes are of making the processes offline -> online, complex -> simplified, physical -> automated, multiple approvals -> less or no approvals; which I see as a positive thing, leaving aside the fact that I was caught in the transition. I hope when you need to implement this, the processes will have been simplified further!