Indian Startup Year-1 Compliance: GST + TDS

An Indian startup, even a bootstrapped two-founder operation, runs into five compliance triggers within its first twelve months:

1. GST registration once aggregate annual turnover crosses Rs. 20 lakh (Rs. 10 lakh in special-category states), or earlier on a voluntary basis to access ITC and B2B credibility.

2. Payroll registration for PF (mandatory at 20+ employees with monthly basic up to Rs. 15,000) and ESI (10+ employees with monthly wages up to Rs. 21,000) once the team grows past those thresholds.

3. TDS deduction on the founder's outbound payments to contractors, professionals, and landlords. Sections 194C, 194J, 194-IB, and 194-O each have separate rate and threshold rules.

4. DPIIT recognition under Department for Promotion of Industry and Internal Trade to unlock Section 80-IAC's three-year tax holiday window and Section 56 angel-tax exemption (the latter now subsumed by Budget 2024's full abolition of Section 56(2)(viib)).

5. An audit-ready document trail: a numbered GST tax invoice or bill of supply for every receivable, a payment receipt acknowledging every paise that comes in, salary slips and Form 16 for every hire, and a TDS certificate for every deduction the founder makes.

The document stack handles flashpoint 5 by default. Flashpoints 1–4 are statutory; you cannot route around them.

Section 22 of the CGST Act 2017 makes GST registration mandatory once aggregate annual turnover crosses Rs. 20 lakh in most states, or Rs. 10 lakh in special-category states (the North-Eastern states, Himachal Pradesh, Uttarakhand, Jammu and Kashmir, and Ladakh). For exclusive suppliers of goods (no service component), the threshold is Rs. 40 lakh in standard states, subject to state-level notifications.

Voluntary registration below the threshold makes sense when:

• B2B clients require a tax invoice for ITC. Mid-market and enterprise buyers' AP processes are often wired only for tax invoices; a bill of supply is rejected by their accounting team.

• Your input GST is significant. If annual inputs are Rs. 10 lakh at 18% GST, voluntary registration recovers Rs. 1.8 lakh in ITC against your output tax.

• You export services on LUT (Letter of Undertaking) without charging GST. Voluntary registration is the gateway to LUT-based exports.

The reverse-charge trap: under Section 9(3) of the CGST Act, certain inward supplies (legal services from advocates, sponsorship services, GTA goods transport) shift the GST liability to the recipient. If you buy these services as an unregistered startup, you owe the GST yourself. Track the reverse-charge list and check it against your professional-services bills in year one.

For the difference between a quotation, an invoice, and a receipt at three stages of a deal, see Invoice vs Receipt vs Quotation.

Every customer transaction in a B2B context generates up to four documents. A startup that issues all four with the right fields avoids the most common downstream disputes.

• Quotation: a price offer before the deal closes. Carries no statutory format requirement, but should include validity period, scope, payment terms, and your business identifiers. Not a payment demand.

• GST tax invoice (pakka bill): mandatory under Rule 46 of the CGST Rules once registered. Must show GSTIN of supplier and recipient (where the recipient is registered), HSN/SAC, item-wise tax breakdown (CGST/SGST or IGST), invoice number in a unique 16-character sequence, and place of supply. Generate compliant tax invoices via the pakka bill generator.

• Payment receipt: separate from the invoice. Confirms that funds were received, with UTR for digital transfers and revenue-stamp placeholder for cash above Rs. 5,000. The pairing of invoice + payment receipt is what survives audit; an invoice alone proves only that you billed, not that you collected. See Payment Receipt: When and Why for the full template and scenarios.

• Advance receipt: where a customer pays an advance against future delivery, GST applies to the advance under Section 13 of the CGST Act. Issue a receipt voucher (a specialised payment-receipt variant) and adjust against the final tax invoice when you deliver. Generate via misc-receipt.

A startup that under-issues invoices (skipping receipts, mixing the two, or using the same template for both) is the typical pattern auditors flag. Keep the four documents distinct.

The first hire triggers a payroll-compliance cascade that the founder usually under-prepares for.

1. PAN: the company's Permanent Account Number. Required for everything from opening a bank account to filing the first ITR. Apply via protean-tinpan.com or directly on the Income Tax e-Filing portal.

2. TAN: Tax Deduction and Collection Account Number. Mandatory before deducting any TDS. Without TAN, the company cannot pay TDS or file the quarterly TDS return (Form 24Q for salary, Form 26Q for non-salary; renumbered Form 138 and Form 140 respectively from 1 April 2026 under the Income Tax Rules, 2026). Apply via Form 49B (renumbered as Form 134 for Government entities and Form 135 for non-Government applicants from 1 April 2026).

3. PF (Provident Fund) under the Employees' Provident Funds and Miscellaneous Provisions Act 1952: mandatory once the company has 20 or more employees. Employer contribution is 12% of basic + DA; employee contribution is the matching 12%. The PF wage ceiling for mandatory coverage is monthly basic of Rs. 15,000, but most startups extend voluntary coverage to all employees regardless of salary.

4. ESI (Employees' State Insurance) under the ESI Act 1948: mandatory at 10 or more employees with monthly wages up to Rs. 21,000. Employer contribution is 3.25% of wages; employee 0.75%. Above the Rs. 21,000 wage ceiling, the employee is out of ESI but the company still pays for those below the ceiling.

5. Salary slip + Form 16 obligation: every employer paying salary subject to TDS must issue a monthly salary slip and an annual Form 16 (Part A and Part B). The salary slip is the employee's primary proof of income for HRA claims, home-loan applications, and visa filings. Generate compliant salary slips for the founding team and early hires.

Get the founding team's payroll right from month one. Mid-year cleanup is more expensive than getting it right from the first hire.

The founder's outbound payments trigger TDS in four common scenarios. See TDS under 194C, 194J, and 194-IB for the deeper guide; the summary:

• Section 194C, payments to contractors. Threshold: Rs. 30,000 per single contract or Rs. 1,00,000 aggregate per financial year. Rate: 1% for individuals/HUF, 2% for others. Applies to website development, design, photography, packaging, courier, AMC contracts.

• Section 194J, fees for professional or technical services. Threshold: Rs. 30,000 per financial year per payee. Rate: 10% (or 2% for technical services and call-centre operations). Applies to lawyer fees, CA fees, IT consultant fees, technical writers, and most retainer-based engagements with individual professionals.

• Section 194-IB, rent paid by individuals or HUFs not subject to tax audit, on rent above Rs. 50,000 per month. Rate: 5%. Deducted only in March of the financial year (or month of vacating, if earlier), not monthly. Applies to a founder paying office rent on their personal PAN before the company has a registered lease.

• Section 194-O, payments by an e-commerce operator to e-commerce participants. Rate: 1% on gross sale value. Applies if the startup itself becomes a marketplace (Section 194-O is on the operator, not the seller).

Deposit deducted TDS by the 7th of the following month via Challan ITNS 281. File quarterly returns: Form 24Q for salary (Form 138 from 1 April 2026), Form 26Q for non-salary (Form 140 from 1 April 2026). Issue Form 16A to the deductee (Form 131 from 1 April 2026) within 15 days of the return due date. Late-deposit interest is 1.5% per month under Section 201(1A).

DPIIT recognition is the gateway to startup-specific tax benefits. The eligibility test, set out in DPIIT Notification G.S.R. 127(E), requires the entity to be an Indian private limited company, LLP, or registered partnership, incorporated within the preceding 10 years, with annual turnover not exceeding Rs. 100 crore in any year, and working towards innovation, development, or improvement of products or processes (or scalable business models with high employment or wealth-creation potential).

Apply via the Startup India portal. The recognition certificate gives access to:

1. Section 80-IAC of the Income Tax Act: a three-consecutive-financial-year tax holiday on profits, claimable in any three years out of the first ten years from incorporation. The section's incorporation-window cutoff narrows eligibility; Finance Acts extend it periodically. Verify the current cutoff before banking on this benefit.

2. Self-certification under nine labour laws and three environmental laws.

3. Easier IPR filing with 80% rebate on patent fees and 50% on trademarks.

Section 56(2)(viib), the 'angel tax' provision that taxed share-issuance premiums above fair market value as 'income from other sources', was a major historical pain. Budget 2024 abolished Section 56(2)(viib) effective AY 2025-26. For startups raising in FY 2025-26 onward, the angel-tax angle is now historical context rather than active risk. Earlier vintages still need to track Section 56(2)(viib) exposure on past funding rounds during ongoing assessments.

Four shifts a founder should track for the year starting 1 April 2026.

1. PAN 2.0: instant e-PAN issuance via Aadhaar, fully digital and free for first-time applicants. The legacy Form 49A application remains valid; PAN 2.0 is the faster path. Useful for the company's PAN and for first-time hires who don't yet have one.

2. GST e-invoicing threshold lowered to Rs. 5 crore aggregate turnover under CBIC Notification 10/2023. Startups crossing Rs. 5 crore must register on the e-invoice portal and generate IRN (Invoice Reference Number) for every B2B tax invoice. Embed the IRN in the issued invoice. The earlier Rs. 10 crore threshold no longer applies.

3. Section 80-IAC sunset clause: subject to extension by successive Finance Acts. Verify the live incorporation-window cutoff on the Startup India portal before relying on the tax holiday in your projections.

4. Faceless assessment now extends to startup ITRs and TDS scrutiny. Notices arrive via the e-Filing portal; you submit responses through the portal without visiting the assessing officer in person. Useful for distributed teams without a registered Mumbai/Delhi office, but requires a clean digital paper trail. Maintain copies of every issued invoice, payment receipt, salary slip, and TDS challan in a structured drive folder so you can answer a faceless notice in days, not weeks.

Keep the issued documents compliant from day one with the pakka bill generator and misc-receipt generator. Faceless review does not accept 'we'll regenerate it' when the original document is missing.

By the end of month one, a founder needs:

• Company PAN and TAN, in hand, used on every outgoing document.

• A numbered tax invoice (or bill of supply if pre-GST-registration) for every paid customer transaction. Generate compliant pakka bills in 60 seconds via pakka-bill.

• A separate payment receipt acknowledging every receivable cleared, with UTR for digital and revenue stamp for cash above Rs. 5,000. Generate via misc-receipt.

• Salary slips for every member of the founding team and every hire, monthly, retained for at least eight years. Use the salary slip generator to produce compliant outputs that mirror Form 16 conventions.

• Rent receipts where the founder is paying personal office rent and claiming HRA. Use the rent receipt generator; cross-check against Rule 26C employer verification once the company starts paying its own rent.

• A TDS register tracking every contractor, professional fee, rent, and e-commerce payment subject to Sections 194C / 194J / 194-IB / 194-O, with Form 16A issued to deductees on time. The Section 269ST cash limit is a parallel constraint to keep on the radar.

• A DPIIT recognition certificate if eligible, filed via the Startup India portal.

For a founding team running this stack across multiple founders and the first 5–20 hires, the corporate bundle gives the entire team access to compliant rent receipt, salary slip, payment receipt, GST invoice, and bill-of-supply generators under a single access code. Plans start at Rs. 499 for 100 credits on a 45-day wallet. That is usually less than a single CA invoice for one of the documents, and the team avoids the rework cycle of issuing non-compliant documents and patching them later.