When starting a startup in India, most founders focus on building their product, finding customers, and hiring a good team. But it's also very important to follow the tax rules from the beginning. Startups must understand and follow laws related to GST (Goods and Services Tax), TDS (Tax Deducted at Source), and Income Tax. These taxes help keep your business legal and financially clean. If you ignore them, it can lead to fines and legal trouble. This guide explains GST, TDS, and Income Tax in a simple way, including when they apply, how to register, file returns, and what benefits or rules may apply for startups, along with the latest updates every founder should know.

In this article, CA Manish Mishra talks about GST, TDS, and Income Tax for Startups: A Founder’s Guide.

GST for Startups: Indirect Tax Obligations

The Goods and Services Tax (GST) is a destination-based, multi-stage, indirect tax applicable to the supply of goods and services. As per the CGST Act, 2017, it replaced multiple indirect taxes such as VAT, Service Tax, and Excise Duty.

Applicability of GST to Startups

Under Section 22 of the CGST Act, any person whose aggregate turnover in a financial year exceeds the threshold limit is required to obtain GST registration:

• ₹40 lakhs for goods (₹20 lakhs for special category states)

• ₹20 lakhs for services (₹10 lakhs for special category states)

However, under Section 24, certain businesses must register irrespective of the turnover, such as:

• Inter-state suppliers

• E-commerce operators

• Those required to pay tax under reverse charge

Startups selling online via marketplaces or involved in interstate transactions are often required to register from the beginning.

Input Tax Credit (ITC)

Section 16 of the CGST Act allows businesses to claim credit for the tax paid on purchases, helping reduce overall tax liability. For startups, maintaining proper documentation and vendor invoices is crucial to avail ITC.

GST Returns

Registered startups must file periodic returns:

• GSTR-1 (monthly or quarterly): for outward supplies

• GSTR-3B: summary return and tax payment

• GSTR-9: annual return (mandatory if turnover exceeds ₹2 crore)

Late filing attracts penalties under Section 47 and interest under Section 50 of the CGST Act.

Recent GST Updates

• Introduction of e-Invoicing is mandatory for businesses with aggregate turnover exceeding ₹5 crore.

• Composition Scheme under Section 10 is available for eligible startups with turnover up to ₹1.5 crore, offering simplified compliance and lower tax rates.

TDS for Startups: Obligations as Deductors

Tax Deducted at Source (TDS) is governed under the Income Tax Act, 1961, and is applicable when a payment is made and tax is deducted at the source before remittance to the recipient.

TDS Applicability for Startups

Once a startup obtains a TAN (Tax Deduction and Collection Account Number), it must deduct and deposit TDS on certain payments:

• Salary payments (Section 192)

• Professional services (Section 194J – 10%)

• Contractor payments (Section 194C – 1% or 2%)

• Rent (Section 194I – 10% for building, 2% for machinery)

TDS Return Filing

TDS returns must be filed quarterly using the following forms:

• Form 24Q – salary

• Form 26Q – non-salary payments

• Form 27Q – payments to non-residents

Due dates are within one month from the end of the quarter. Delay in filing attracts a penalty under Section 234E of ₹200/day, capped at the TDS amount.

TDS Certificates

Form 16/16A must be issued to deductees, confirming the amount deducted and deposited. Failure may result in disallowance of expenses under Section 40(a)(ia).

Income Tax for Startups: Direct Tax Responsibilities

The Income Tax Act, 1961, mandates all entities including startups to compute and pay tax on their profits annually. Income tax compliance is essential not only for legal reasons but also to avail benefits under the Startup India initiative.

Startup Tax Benefits under Section 80-IAC

Eligible startups registered under DPIIT (Department for Promotion of Industry and Internal Trade) can claim a 100% tax exemption on profits for any three consecutive years out of the first ten years since incorporation, provided:

• Turnover does not exceed ₹100 crore in any financial year

• It is incorporated as a private limited company or LLP

• It is engaged in innovation or improvement of products/processes

Tax Rates for Startups

• Companies (Domestic): 25% (under Section 115BAA)

• LLPs: 30%

• Individuals/Proprietorships: Slab rates apply

Presumptive Taxation for Small Startups

Startups with turnover less than ₹2 crore (business) or ₹50 lakh (profession) may opt for presumptive taxation under:

• Section 44AD (business): 6% for digital transactions, 8% otherwise

• Section 44ADA (profession): 50% of gross receipts treated as income

Filing and Audit Requirements

• Income Tax Return (ITR-5 or ITR-6 for companies and LLPs)

• Audit under Section 44AB if turnover exceeds ₹1 crore (business) or ₹50 lakh (profession)

Startups with foreign investments must also comply with Transfer Pricing under Section 92E and file Form 3CEB.

Common Challenges Faced by Startups in Tax Compliance

• Lack of awareness about registration thresholds and due dates

• Complex documentation for input credit and vendor reconciliation

• Errors in TDS deduction and return filing

• Ignoring tax planning strategies such as presumptive taxation

• Missing out on Section 80-IAC due to delayed DPIIT recognition

Recommendations for Founders

• Register for GST and TAN as soon as statutory conditions are met.

• Maintain clean, digital accounting records for all transactions.

• Hire a tax advisor to assist with classification, TDS deductions, and return filing.

• Apply for DPIIT recognition early to avail tax exemption.

• Use accounting software integrated with GST and TDS functionalities.

• Review tax obligations quarterly to avoid year-end surprises.

Conclusion

Tax laws like GST, TDS, and Income Tax is not just a legal formality it’s a key part of running a successful business. Many new founders focus on developing their products or services, but ignoring tax compliance can lead to serious problems such as heavy penalties, loss of government benefits, and even legal action. By registering under GST, deducting TDS correctly, filing income tax returns on time, and keeping proper records, startups can stay on the right side of the law. Government schemes like Startup India also offer tax benefits, but they are only available if you follow the required rules. Taking help from tax professionals or advisors can make this process easier. Being tax-compliant from the start builds trust with investors, banks, and customers, and sets the stage for long-term growth and stability. It helps founders avoid unwanted surprises and keeps the business focused on what matters most growth, innovation, and success.

FAQs

Q1. Is GST registration mandatory for all startups?
Ans. No. It becomes mandatory once the startup crosses the threshold turnover or falls under compulsory registration categories (inter-state supply, e-commerce, etc.).

Q2. Can a startup claim input tax credit under GST?
Ans. Yes, provided it is registered under GST and all conditions under Section 16 of CGST Act are satisfied.

Q3. What is the penalty for late GST return filing?
Ans. A late fee of ₹50/day (₹20 for nil returns) and interest @18% p.a. is applicable under Section 47 and Section 50 respectively.

Q4. Does every startup need to deduct TDS?
Ans. Yes, if the startup has obtained TAN and makes payments that fall under specified TDS provisions.

Q5. What is the due date for TDS return filing?
Ans. TDS returns are filed quarterly, within one month from the end of each quarter.

Q6. How can a startup avail tax exemption under Section 80-IAC?
Ans. By getting DPIIT recognition and fulfilling eligibility conditions such as turnover below ₹100 crore and innovation-driven business.

Q7. What is the tax rate applicable to a private limited startup?
Ans. 25% under Section 115BAA, excluding surcharge and cess.

Q8. Can a startup opt for presumptive taxation?
Ans. Yes, under Sections 44AD and 44ADA, if turnover is within prescribed limits.

Q9. What is the penalty for failure to deduct TDS?
Ans. Penalty under Section 271C and disallowance of expense under Section 40(a)(ia) may apply.

Q10. Are there any recent updates for startups in taxation?
Ans. Yes, e-Invoicing applicability has been extended to firms with turnover above ₹5 crore. Also, updates in Section 194R, 194S on TDS on benefits and crypto assets affect digital startups.