Indian Startups - raised funds in FY20? don't miss this deadline..

Specified Financial transaction under Income Tax Regime – The startups and SMEs

Introduction

Specified financial transactions are defined under Income Tax act, and it has a long list of transactions during the financial year which is covered. Broadly it is applicable to Banking Company, cooperative bank, NBFC, listed company, mutual funds, Authorized Dealers (AD) and property registrar (“Class of persons” or “Reporting persons”). Considering these are special institutions, however there are certain transactions which may be applicable for private companies or any small business entity as well. Hence, this paper has been limited to those specified transactions only which may affect a startup or SME entity practically and the need for compliance is warranted, which if not followed may have serious implications and consequences.

Specified Financial Transaction (SFT)

When a particular class of person / reporting person enters into a specified financial transaction, it is obligated to maintain records, ensure compliance and report the same as a Specified Financial Transaction under section 285BA of the Income Tax Act, 1961 read with Rule 114E.

The following transactions are reportable:

Compliance - Forms & Content:

? Form 61A – Due Date 31st May 2020, extended to 30th June 2020 due to Covid-19.

? Details to be furnished – Name of the party transacted with, Address, type, PAN, DOB / DOI, Phone, Email, Transaction Value etc.

PAN / Aadhar - Section 139A read with Rules 114 to 114D

Section 139A specifies the conditions in which any person is obligated to apply for allotment of permanent account number (PAN), whether any tax is payable by him or not. It may be for the purpose of taxation or for collecting of information by the Government. One can always apply for the PAN voluntarily. [To be read with Rule 114]

Further, the section provides that every person entering into certain transactions shall quote their PAN and / or Aadhar number and the person receiving any document relating to prescribed transaction shall ensure that the PAN / Aadhar is authenticated. The prescribed relevant transactions are given below: [Rule 114B & 114C]

1. Sale or Purchase of Shares of an Unlisted Company – Rs.1Lakh and above

2. Payment for acquiring Debenture or Bond of any company - Rs.50K and above

3. Sale or purchase of goods or services – Rs. 2lakh and above per transaction.

Thus, it can be observed that, the specified transaction is aligned in both the cases of quoting of PAN as well reporting under SFT.

If the said person (e.g. Investor), does not have a PAN, one can make a declaration in Form 60 to such Company issuing shares / debentures. The Company is mandated to verify the PAN or collect Form 60 (as the case may be).

The said Form 60 (wherever applicable) is required to be filed in Form 61 with the Income Tax Authorities and the Company is required to retain Form 60 for 6 years from the end of Financial Year. [Rule 114D]

Compliance - Forms & due dates:

? Form 61

Due Date 31st October 2019 – If declaration received by 30th Sep 2019

Due Date 30th April 2020 – If declaration received by 31st Mar 2020

Interestingly, while filing of form 61A (SFT), if PAN of the party is not furnished, it is mandatory to fill the acknowledgement number of the Form 61 filed. The law has beautifully ensured that all the dots are well connected. However, there is always scope for improvement and still there are some unsolved issues:

Issue & Challenges:

Proviso to Rule 114B states that, any person not holding PAN can submit a declaration in Form 60. However, the format for Form 60 states, the form is applicable for Individual and Persons (not being a company or firm) only. The question arises, if a Non-Resident LP or a Company invests in an Indian Company and does not hold PAN, what should be the solution? The Rules does allow to obtain Form 60, however, the Form 60 itself does not allow the same.

Consequences of Non-Filing

Penalty (S.271FA) of Rs.100 per day of default or on receiving notice, Rs.500 per day of default

Legal References [Income Tax Act and relevant rules]

Section 285BA - Obligation to furnish statement of financial transaction or reportable account.

114 E (Form 61A) - Furnishing of statement of financial transaction.

Section 139A - Permanent account number (PAN)

114 B - Transactions in relation to which permanent account number is to be quoted in all documents for the purpose of clause (c) of sub-section (5) of section 139A

114 C - Verification of Permanent Account Number in transactions specified in rule 114B

114 D - Time and manner in which persons referred to in rule 114C shall furnish a statement containing particulars of Form No. 60

The Author is a fellow member of ICAI and can be reached out at [email protected]. He was an All India Rank holder in CA (2nd and 15th) and CS (25th and 11th) examinations and has headed multiple global and Indian startups in the past. He is a startup consultant, fund raiser and also an author of the book “FINCURIOUS” on Startup finance.