For startups, it is very important to have an advance tax planning before registering their business with a specific business structure. Most of the startups in India either choose to be an LLP or a PLC while registering the company. LLP stand for Limited Liability Partnership and PLC stands for Private Limited Company. So, before you decide, you must know the tax structure in India made for various business types. Both the structures are recognizable under the “Startup India campaign” and according to Union Budget 2017, Startups Will Enjoy 100 Percent Income Tax Benefit for Some More Time, which is a great news for the startups. So, let’s see what are the differences between these two structures. The important fact in deciding a business structure is tax planning under which the entity must pay tax.
Dividend Distribution Tax Structure:
LLPs are not liable to pay any dividend distribution tax but it is different for PLCs. For PLCs, when they share their profit, a dividend distribution tax applies on them at a rate of 15%. tax structure in India also adds surcharge and Cess on this Dividend tax. This tax is levied on the gross amount of the dividends as mentioned under Section 115-O. After adding up the Cess and surcharges, the tax comes up to approximate 21%. However, the shareholders or company can claim a deduction on this amount but it is an important subject to consider while deciding tax planning for startups.
Tax liability of the person receiving the distributed profits:
For LLPs, the distributed profits are tax exempt in partner’s hand under section 10(2A). For PLCs also distributed dividends are tax exempt in partner’s hand but if the amount exceeds INR 10 Lakhs then the amount will be taxable at a rate of 10% according to tax structure in India under section 115BBDA. This means, shareholders must pay an additional tax on this type of dividends and such applies to all resident of India. The Income Tax Deductions You Can Avail Before It is Too Late.
Rate of Tax:
For LLPs, the applicable tax rate is flat 30% and if their turnover exceeds INR 1 Cr then an additional 12% of surcharge will be added to it. Also with that, a 2% of education cess, SHEC at 1% will be applicable on tax. Now moving to the tax structure in India for the PLCs which has a 25% of tax rate if turnover does not exceed INR 50 Cr. For turnover exceeding INR 50 Cr, the applicable tax amount will be 30% + surcharge. The surcharge will be imposed at a rate of 7% if the turnover of the company is between 1Cr-10Cr. Above 10 Cr the tax rate is 12%. Also, an education Cess at 2% and a SHEC at 1% will be applicable.
These are the facts regarding tax planning, which every startup need to consider before registering their business.