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What If A Firm Takes The Secretly Non – Compliant Path?

What If A Firm Takes The Secretly Non – Compliant Path

A company being non – compliant, Ooh, that sounds interestingly controversial, doesn’t it? This topic has been among the most sorted topics in debate stages. In fact, there are a number of businesses that have taken the path, and lucky for some doing well.

Did you ever feel – heck with compliance works, the firm will just do a minimum of the essentials? Well, hold on, right there. In this blog, we will look into the scary truth of being a non – compliant firm (stressing on Companies).

The most common reason for such non-compliance that we found in our survey is lack of awareness. Businesses are most vulnerable in the first two-three years of their business. In these years, the majority of businesses do not generate revenue, and in some cases, there are hardly any expenses. This leads to a wrong belief that since there has not been much activity, there is no need for reporting to be done. The reality, however, is far from this. Irrespective of the whether there is any revenue or even there is any transaction businesses are supposed to comply with compliance requirements.

A Game You Should Avoid Playing – Consequence Of Noncompliance:

Following are some of the brief consequences in which failing to comply can cost your business.

  1. A roadblock in Funding –

The pre-requisite of any funding exercise is the status of tax and regulatory compliances. Never has a company got funded, even in the seed investment level, whose compliances are not up to date. Non-compliant startups do not even live through the term sheet stage. Further, there is a severe negative marking for compliances done post due date with additional fees.

  1. A roadblock in the availability of Bank loan–

External angel/venture funding is out of the question, next source of funding for any business is the bank loan. However, even banks require compliance documents like audited financials, auditor’s report, auditor’s certificate for the last 3 years or as the case may be. Chances of a non-compliance company availing bank loans are next to zero percent.

  1. A roadblock in the availability of Government Tenders-

The same principle applies to Govt tenders. The pre-requisite of any such tender is a compliant business environment, where all reporting is up to date.

  1. Stamp of a “Dormant” Company-

Companies with a non-filing history of 3 years or more are often categorized by the Ministry as ‘dormant’ companies. These companies can never be eligible for any sort of Govt/institutional assistances/contracts. Apart from that, these companies are vulnerable to RoC demand notices technically at any time.

  1. Liability of Directors-

Now, one may think that simply closing down the inactive company or starting up a totally new company would solve the problem. However, that is not so. A director of a company which has not filed its returns for 3 consecutive years is disqualified to become a director in any other company as per the Companies Act, 2013. In other words, his DIN gets blocked and he would not be able to start a new company.

  1. General Penalties-
  • The penalty for Non- Preparation of Financial Statements – 

It is punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 500,000 or both.

  • The penalty for Non- filing of Income Tax Return Filing–

It will attract interest u/s 234A and i.e. if the assessee fails to file its income tax return within the time prescribed by section 139, then he shall be liable to pay interest @ 1% per month or part of the month from the due date of filing of return to the actual date of filing of its return. A further penalty can be levied up to Rs. 5,000 for non-filing of tax returns us 271F.

  • The penalty for Non-filing of Annual RoC forms– 

Additional fee leviable as per specified MCA slabs, which may extend up to 12 times of original fees. Apart from this, provisions for striking off the company and prosecution are also present.

The compliance requirements can be complex, and business owners may not always be fully educated about the least rules and regulations and if you concerned about your company compliance status, consider hiring a human resources experts to protect your business legal and financial standing. After all, when it comes to noncompliance issues, ignorance of the law is no defense. We at  Wazzeer are vouched by entrepreneurs as the reliable Legal and Accounting Partner, we would be excited to help you, so Let’s Connect!

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