Being one of the oldest and most popular forms of commercial organization in India, partnership firms have seemed to struggle with compliance issues of late, especially in relation to TAX in India.
Tax Compliances for Partnership Firms in India
A partnership, according to Section 4 of the Indian Partnership Act, 1932, is a “relation between persons who have agreed to share the profits of a business carried on by all or any of them acting on behalf of all”. Formally, it takes a few basic requirements to form a partnership:
- There must be two or more persons in the relation.
- The partnership must be the result of an agreement between partners.
- The aim must be to carry on a business.
- That business may be operated by anyone or one person acting on behalf of every other.
Advantages of forming a Partnership:
- Ease of formation: Note that there are no formal requirements to begin and carry on commercial activities by a partnership. You don’t even need to register the firm. But if you do, you would enjoy certain advantages in terms of claiming shares in profit against co-partners or parties to a contract.
- Confidentiality of accounts: A partnership firm does not need to make records of account public like a company with the Registrar of Firms.
- No Minimum Paid-up capital required.
Partnership firms, not unexpectedly, abound in India’s unorganized sector. They can take up any name that does not have a trademark registered against it. They do have certain disadvantages summarized below:
Disadvantages of a Partnership:
- No Limits to Liability of Partners: The biggest disadvantage of a partnership is that partners are solely and completely liable for losses and debts arising out of the business.
- Absence of Perpetuity: Unlike a company, which has a separate legal existence, a partnership dissolves when any of the partners dies.
- Limited Capital: Partnerships do not have the option of tapping the equity or other capital markets for financing their business.
Partnerships are giving way to their related cousin, the Limited Liability Partnership, which removes the drawback of unlimited liability for members of the firm. LLPs are registered under the Limited Liability Partnership Act, 2008
Tax Liabilities of Partnerships:
- Partnerships are liable to both taxes in the name of the firms and income taxes in the name of individual partners (Section 184). If they keep employees, they are also liable to deduct TDS before disbursing salaries to employees.These firms are differentiated on the basis of Taxable Income.
- If taxable income is less than Rupees 1 crore per annum then the tax rate is 29% of this amount plus education cess @ 3%.
- If taxable income is greater than Rupees 1 crore per annum then the tax rate is 29% of this amount plus surcharge @ 7% and education cess @ 3%.
- If taxable income is less than Rupees 1 crore per annum then the tax rate is 30% plus 3% education cess.
- If taxable income is greater than Rupees 1 crore but less than Rupees 10 crore, the tax rate is 30% plus 7% surcharge and 3% education cess.
- If taxable income is greater than Rupees 10 crore per annum then the tax rate is 30% plus 12% surcharge and 3% education cess.
- As business entities, partnerships are liable to GST registration and income tax returns both requiring to be filed online.
- If the gross receipts of the Partnership exceed Rupees 1 crore in any prior fiscal year or Rupees fifty lakh in the previous year, the accounts and bookkeeping records of the business need to be audited by a qualified professional and furnished by a specified due date to the tax authorities.
- Small businesses with annual turnovers less than Rupees two crore have the option of opting for the Composition Scheme (Section 44AB) whereby they pay income tax at a fixed rate of 8% of turnover. This rate falls to 6% for that amount of gross receipts which are received in the form of account payee cheques, drafts or electronic payments.
It has to be remembered that individual situations may call for special attention to detail and attract different sections under the Income Tax, Wealth, Finance and other relevant acts. Tech enabled tax solution platforms such as AllIndiaITR (a product of Corwhite Solutions Private Limited) are making a difference to tax challenges throughout the country by enabling affordable and accessible services as financial experts.