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Business · 8 May 2026

Indian Startup Year-1 Compliance: What GST, TDS and Payroll Actually Require?

An Indian startup hits five compliance flashpoints in its first year: GST registration (mandatory above Rs. 20 lakh aggregate turnover, Rs. 10 lakh in special-category states), payroll setup (PF mandatory at 20+ employees, ESI at 10+ employees with salary up to Rs. 21,000), TDS deduction on contractor and professional fees, DPIIT recognition for Section 80-IAC tax holiday access, and an audit-ready document trail behind every customer transaction.

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Myth

A startup below the GST turnover limit never has to deal with GST.

Fact

Under Section 9(3) of the CGST Act[9], reverse charge shifts GST onto an unregistered buyer of legal, sponsorship, or goods-transport services, who then owes the tax personally.

What are the five compliance flashpoints in a startup's first year?

Short answer

GST above Rs. 20 lakh turnover, PF/ESI payroll, TDS on outbound payments, DPIIT recognition for Section 80-IAC[3], and an audit-ready document trail.

  • GST once turnover crosses Rs. 20 lakh (Rs. 10 lakh in special-category states), or earlier voluntarily.
  • Payroll for PF (20+ employees) and ESI (10+ employees, wages up to Rs. 21,000).
  • TDS on contractor, professional, and landlord payments under Sections 194C, 194J, 194-IB, and 194-O.
  • DPIIT recognition via Startup India[4] for the tax holiday and historic angel-tax exemption.
  • A trail of tax invoices, payment receipts, salary slips, Form 16, and TDS certificates.

When must a startup register for GST, and when is voluntary registration worth it?

Short answer

Section 22 of the CGST Act 2017[1] makes it mandatory above Rs. 20 lakh turnover (Rs. 10 lakh special-category states; Rs. 40 lakh for exclusive goods suppliers).

  • Special-category states: the North-Eastern states, Himachal Pradesh, Uttarakhand, Jammu and Kashmir, and Ladakh; the Rs. 40 lakh goods limit follows state notifications.
  • Register voluntarily when B2B clients need a tax invoice for ITC and reject a bill of supply.
  • Rs. 10 lakh of annual inputs at 18% recovers Rs. 1.8 lakh in ITC, and registration is the gateway to LUT-based service exports.
GST registration thresholds, mapped

Which documents does every B2B transaction generate?

Short answer

Up to four: a quotation, a Rule 46[10] GST tax invoice, a payment receipt, and an advance receipt voucher where GST applies on advances under Section 13.

  • A quotation is a pre-deal price offer with no statutory format; it is not a payment demand.
  • A tax invoice (pakka bill) under Rule 46 needs both GSTINs, HSN/SAC, item-wise CGST/SGST or IGST, a unique 16-character number, and place of supply; make one via pakka-bill. If a seller refuses to issue a GST invoice, the buyer has legal recourse — see what to do when a seller refuses a GST invoice.
  • A payment receipt confirms funds received (UTR for digital, revenue stamp for cash above Rs. 5,000); an invoice alone proves you billed, not collected. See Payment Receipt: When and Why.
  • For an advance, issue a receipt voucher and adjust it against the final invoice via misc-receipt.
Tax invoice field anatomy

What does the first hire trigger: PAN, TAN, PF, ESI and Form 16?

Short answer

PF is mandatory at 20+ employees (12% of basic+DA, Rs. 15,000 ceiling) under the EPF Act 1952[6]; ESI at 10+ employees with wages up to Rs. 21,000 under the ESI Act 1948[7].

  • PAN is needed to open a bank account and file the first ITR; TAN is mandatory before deducting any TDS, applied for via Form 49B (Form 134 for Government and Form 135 for non-Government applicants from 1 April 2026).
  • PF is 12% of basic+DA matched by the employee; many startups extend voluntary coverage above the Rs. 15,000 ceiling.
  • ESI is 3.25% employer and 0.75% employee; above Rs. 21,000 the employee exits ESI while the company covers those below.
  • Every salary paying TDS needs a monthly slip and annual Form 16 (Parts A and B); make them via the salary slip generator.

How much TDS does a founder deduct under Sections 194C, 194J, 194-IB and 194-O?

Short answer

Contractor 1%/2%, professional/technical 10%/2%, rent over Rs. 50,000/month 2%, e-commerce 0.1%, per the Income Tax Act[8].

Deposit TDS by the 7th of the following month via Challan ITNS 281; late-deposit interest is 1.5% per month under Section 201(1A). See TDS under 194C, 194J, and 194-IB.

  • File Form 24Q salary (Form 138 from 1 April 2026) and Form 26Q non-salary (Form 140 from 1 April 2026) quarterly.
  • Issue Form 16A to the deductee (Form 131 from 1 April 2026) within 15 days of the return due date.
SectionApplies toThresholdRate
194CContractors (web dev, design, courier, AMC)Rs. 30,000 per contract or Rs. 1,00,000 per FY1% individuals/HUF, 2% others
194JProfessional/technical feesRs. 50,000 per FY per payee10% (2% technical/call-centre)
194-IBRent by individuals/HUF not under tax auditAbove Rs. 50,000 per month2%, in March or on vacating
194-OE-commerce operator paying participantsOn gross sale value0.1% (5% without PAN)

TDS thresholds and rates for founder payments. Source: Sections 194C/194J/194-IB/194-O, Income Tax Act 1961.

What does DPIIT recognition unlock, and is angel tax still a risk?

Short answer

DPIIT Notification G.S.R. 127(E)[4] opens the Section 80-IAC[3] three-year tax holiday; Budget 2024 abolished angel tax (Section 56(2)(viib)) from AY 2025-26.

  • Eligibility needs an Indian private limited company, LLP, or registered partnership, incorporated within the preceding 10 years, with turnover never above Rs. 100 crore.
  • Section 80-IAC gives a three-consecutive-year tax holiday claimable in any three of the first ten years; verify the live incorporation-window cutoff first.
  • Recognition adds self-certification under nine labour and three environmental laws, plus an 80% patent and 50% trademark fee rebate.
  • Earlier vintages still track Section 56(2)(viib) exposure on past funding rounds during assessments.

What changes for FY 2026-27 from 1 April 2026?

Short answer

GST e-invoicing drops to Rs. 5 crore turnover under CBIC Notification 10/2023[2], PAN 2.0 brings instant free e-PAN, and faceless assessment extends to startup ITRs.

  • PAN 2.0 issues instant Aadhaar-based e-PAN, free for first-time applicants, alongside the still-valid Form 49A path.
  • Above Rs. 5 crore, generate and embed an IRN for every B2B tax invoice; the earlier Rs. 10 crore threshold no longer applies. See e-invoicing and the Rs. 5 crore GST threshold for the exact compliance steps.
  • The Section 80-IAC sunset depends on Finance Act extensions; verify the live cutoff on the Startup India portal.
  • Faceless assessment now covers startup ITRs and TDS scrutiny via the e-Filing portal, so keep every invoice, receipt, slip, and challan filed.
E-invoicing IRN threshold explained

What is the day-one document stack for a founder?

Short answer

Company PAN and TAN, a numbered Rule 46[10] tax invoice plus separate payment receipt per transaction, salary slips kept eight years, rent receipts for HRA, and a TDS register.

Generate a Rule 46-compliant pakka bill

References

  1. 1.Section 22, Central Goods and Services Tax Act 2017 — CBIC — GST registration threshold (Rs. 20 lakh / Rs. 10 lakh special-category states)
  2. 2.GST e-invoicing notification (Notification 10/2023-Central Tax) — CBIC — E-invoicing mandatory above Rs. 5 crore aggregate turnover
  3. 3.Section 80-IAC, Income Tax Act 1961 — Income Tax Department — Three-of-ten-year tax holiday for DPIIT-recognised eligible startups
  4. 4.DPIIT Notification G.S.R. 127(E) — Department for Promotion of Industry and Internal Trade — Startup recognition criteria and process
  5. 5.Section 56(2)(viib) and Finance Act 2024 — Income Tax Department — Angel tax provision; abolished from AY 2025-26 by Budget 2024
  6. 6.Employees' Provident Funds and Miscellaneous Provisions Act 1952 — Ministry of Labour — PF applicability at 20+ employees, basic salary ceiling
  7. 7.Employees' State Insurance Act 1948 — Employees' State Insurance Corporation — ESI applicability at 10+ employees, wage ceiling Rs. 21,000
  8. 8.Sections 194C, 194J, 194-IB, 194-O — Income Tax Act 1961 — TDS on contractor, professional, rent, and e-commerce payments
  9. 9.Section 9(3), CGST Act 2017 — CBIC — Reverse charge mechanism on notified supplies
  10. 10.Rule 46, Central Goods and Services Tax Rules 2017 — CBIC — Tax invoice mandatory fields

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