The software industry in India has experienced remarkable growth, playing a significant role in the country’s economy. With the rise of tech startups and software companies, understanding the nuances of taxation, specifically Goods and Services Tax (GST), becomes crucial. This article will explore how GST applies to software products and services, the GST registration process, and how to start a software company with a private limited company structure in India.
What is GST on Software?
GST is a unified tax system implemented in India that applies to goods and services. When it comes to software, GST can be applicable on both products and services, depending on the type of software being provided. It is important to note that software can be classified as either:
- Packaged or Pre-packaged Software (Goods): This includes software sold in physical form, such as on CDs or DVDs. Pre-packaged software is classified as goods and attracts GST at the rate of 18%.
- Customized Software (Services): This refers to software developed specifically for a client or customized to meet certain requirements. Customized software is considered a service under GST and attracts 18% tax as well.
GST Rates on Software
As mentioned, the GST rate on software in India is set at 18%. This applies uniformly across both software sold as a product (goods) and customized software (services). For software companies or individuals selling software products, it’s essential to charge GST at the applicable rate and ensure compliance with the GST laws.
GST Registration for Software Companies
For software companies, GST registration is mandatory if their turnover exceeds a certain threshold. As per the current regulations, any business with an annual turnover exceeding ₹20 lakhs (₹10 lakhs for special category states) must register for GST.
Steps to GST Registration:
- Visit the GST Portal: Go to the official GST website (https://www.gst.gov.in/) and click on ‘Register Now.’
- Select New Registration: Under the ‘New Registration’ tab, fill out the necessary details, such as your business name, PAN, state, and email ID.
- Submit OTP for Verification: After submitting your details, you will receive an OTP for verification.
- Fill the GST REG-01 Form: Complete the GST REG-01 form by providing information about your business, including its nature, directors, and registered address.
- Upload Documents: You will need to upload several documents, including PAN card, proof of business, bank details, and photographs of the directors or owners.
- Receive GST Number: Once your application is verified, you will be issued a GST Identification Number (GSTIN), and you can start filing GST returns.
Benefits of GST Registration for Software Companies
- Legitimacy and Credibility: Registering for GST enhances your company’s credibility with clients, particularly larger organizations and government entities.
- Input Tax Credit (ITC): A registered software company can avail input tax credit, meaning you can claim credit for the GST paid on business-related purchases.
- Compliance with Law: Avoid penalties and interest charges by ensuring that your software company is compliant with GST regulations.
- Ease of Doing Business: With a GST number, your company can seamlessly handle transactions across different states in India without dealing with multiple state tax systems.
How to Start a Software Company with a Private Limited Company
A private limited company company registration is one of the most preferred business structures for software companies in India. It offers various advantages, including limited liability, ease of raising capital, and better credibility with clients.
Here’s a step-by-step guide on how to start a software company with a private limited company structure:
1. Choose a Unique Company Name
The first step is to select a unique and distinctive name for your software company. The name should comply with the Companies Act, 2013, and not infringe on any trademarks.
2. Obtain Digital Signature Certificate (DSC)
Since the registration process is entirely online, directors must first obtain a Digital Signature Certificate (DSC) to sign documents electronically.
3. Apply for Director Identification Number (DIN)
All directors must apply for a DIN. You can obtain this by filling out the SPICe+ (Simplified Proforma for Incorporating a Company Electronically Plus) form on the Ministry of Corporate Affairs (MCA) portal.
4. Drafting the Memorandum and Articles of Association
The Memorandum of Association (MOA) and Articles of Association (AOA) are crucial documents that outline the objectives and rules for operating the company. You must draft these documents and submit them online.
5. Register on MCA Portal
Go to the MCA portal and fill out the SPICe+ form for company incorporation. You will need to provide information about your business, directors, registered office, and share capital.
6. Submit Required Documents
Documents like the PAN of the directors, address proof, and the DSC will be required during registration. Ensure that all documents are uploaded correctly.
7. Obtain Certificate of Incorporation
Once the Registrar of Companies (ROC) verifies your application and documents, your company will be issued a Certificate of Incorporation. This certificate formally recognizes your business as a legal entity.
8. Apply for GST Registration
After incorporating your private limited company, apply for GST registration, especially if your software company is expected to cross the annual turnover threshold of ₹20 lakhs.
Benefits of Starting a Software Company as a Private Limited Company
- Limited Liability: The personal assets of the directors and shareholders are protected, limiting liability to the amount invested in the company.
- Fundraising Opportunities: A private limited company can raise capital through equity, making it easier to expand and scale the business.
- Perpetual Succession: The company continues to exist even if the directors or shareholders change, ensuring business continuity.
- Better Credibility: Clients and investors are more likely to trust a private limited company, especially when working on high-value software contracts.
- Tax Benefits and Compliance: A private limited company structure ensures better compliance with tax regulations, and as mentioned, you can claim Input Tax Credit (ITC) on GST.
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Conclusion
For software companies in India, understanding GST on software products and services is essential for ensuring compliance and making use of available tax benefits. Whether you’re selling packaged software or offering customized software services, ensuring your business is GST-registered is crucial for legal compliance, credibility, and financial growth.
Additionally, starting your software business as a private limited company brings numerous advantages, including limited liability, fundraising opportunities, and enhanced business credibility. By following the steps outlined for private limited company registration and securing your GST registration, you can ensure that your software company operates smoothly in the highly competitive tech market.
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