Section I: Businesses
1. Selecting the Legal Entity< Setting up a new venture one of the first questions you encounter when you begin your business is what legal entity it should be set up as. Depending on the nature and size of the business some of the legal entity options available are:
a. Sole Proprietorship
b. Limited Liability Partnership
c. Private Company
d. Public Company
e. Joint VentureAs such, there is no legal rule that a ‘company’ must be formed to start a business. Incorporating a company has its own pros and cons. Forming a company increases compliance work. If your business is growing rapidly and becomes unmanageable, it helps to separate it into a separate legal entity which will have its own PAN and will file a separate tax return. Else you may choose to carry on your business as a sole proprietor.
2. Maintaining Books of AccountsIf as a business any of the following criteria are met, then maintaining the books of accounts as per the income tax act is mandatory:
a. Income is more the Rs. 1,20,000; or
b. Total sales, turnover or gross receipts are more than Rs. 10,00,000In any of the three immediately preceding previous years. This condition has further been relaxed for individuals and HUF where they will be bound by the mandate of maintaining books of accounts only if :
a. Income is more than Rs 2.5 lakhs or
b. Total sales, turnover or gross receipts are greater than Rs 25 lakhs in any of the three immediately preceding previous years.
3. Tax AuditFor businesses having gross receipts of more than Rs 1 crore in a financial year are liable for tax audit.The due date of filing the tax audit report is 30th September of the assessment year. The tax audit report must be filed electronically via Form 3CD. For taxpayers subject to tax audit, the due date for filing of return of income is also 30 September of the assessment year. Under normal circumstances, revision of a tax audit report is not possible. However, in cases where the accounts have been revised it is possible to revise the tax audit report.
4. Due Datea. Due date for filing of tax audit report – 30th September of the assessment year b. Due date for return filing (if tax audit is applicable) – 30th September of the assessment year c. Due date for return filing (if tax audit is not applicable) – 31st July of the assessment year
5. Presumptive TaxationPresumptive taxation for businesses is covered under section 44AD of the income tax act. Any business which has a turnover of less than Rs 2 crore can opt to be taxed presumptively. They must declare profits of 8% for non-digital transactions or 6% for digital transactions, whichever one is applicable. The following businesses are excluded from presumptive taxation:
a. Life insurance agents
b. Commission of any kind
c. Running the business of plying, hiring or leasing goods carriages
A. Computation of Presumptive Taxation
B. Benefits of Presumptive Taxation
- National Defence Fund set up by the Central Government
- Prime Minister’s National Relief Fund
- In presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will pay tax on that income
- If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay tax on that income
- You don’t have to maintain accounting records
- You don’t have to get your accounting records audited
- You have to pay advance tax – but instead of estimating income and paying tax each quarter, you can pay all your advance tax before March 31. Advance tax, for taxpayers having opted for the presumptive scheme, is to be paid by 15th March of the relevant financial year if you expect that your income tax liability will exceed Rs.10,000 in the financial year
6. International Transaction
a. TDS deducted by the foreign clientIf you work for clients out of India, payments may be received by you via paypal or as a direct credit to your bank account. Mostly, the foreign client would deduct taxes before releasing the payment to you in accordance with the local tax laws there. You, as a resident of India, would anyway be liable to income tax on all your income. However, you can claim credit for taxes paid overseas, in your return of income.
b. TDS not deducted by the foreign clientIf no TDS has been deducted, there is nothing to worry. You need to include these receipts in your total income while making income calculations and pay applicable tax on them since you will be a tax resident of India. To meet advance tax requirements you may have to estimate your annual income from all sources.
7. Return of IncomeAn individual of HUF carrying on business will be bound to file his return of income in form ITR 3 For a taxpayer who opts for presumptive tax is supposed to file his return in ITR 3
Section II: Professionals
1. Professions for the purpose of Indian tax laws
- Architectural profession
- Technical consultant
- Interior decoration
2. Maintenance of books of accounts
a. Professionals carrying on specified professionsProfessionals carrying on the above mentioned specified professions are required to maintain books of accounts in accordance with Rule 6F of the Income tax Rules. Such professionals will be required to maintain accounting records if gross receipts exceeds Rs. 1.5lakhs in any of the 3 immediately preceding years. In case he has started off with his profession in a particular year and his receipts exceed Rs 1.5 lakhs for that year, he is again supposed to maintain accounting records for that year. These are the accounting records that have been prescribed under Rule 6F
i. Cash Book – A book to record all the cash receipts and payments which helps you know your cash balance at the end of the day or end of the month.
ii. Journal – You have to maintain a log of all your day to day transactions . In accounting terms, you have to record all the debits and credits, when you are following the mercantile system of accounting.
iii. Ledger – A book where all your entries flow from journal, has details of all the accounts and simplifies the preparation of your financial statements at the end of a year
iv. You have to maintain photocopies of all the bills or receipts if the value is more than Rs. 25
v. Lastly, you have to maintain the original bills or receipts if the value is more than Rs. 50If you are into the medical professions, you must maintain these additional records too.
vi. Daily case registers with details of patients, fees received, services provided and date of receipt
vii. Stock details of the medicines and other consumable items on the daily basis
b. Professionals carrying on non-specified professionsIf you are carrying on any profession other than those discussed above, you would need to maintain such books of accounts so as to enable an assessing officer to calculate your taxable income as per Income tax laws. However, this mandate would arise only when income, if you are an individual, exceeds Rs. 2.5 lakhs or gross receipts are more than Rs. 25 lakhs in any one of the immediately 3 preceding years.
3. Computation of Taxable IncomeA professional could easily arrive at his taxable “Income under the head Profits and Gains from Business or Profession” by reducing all his profession related expenses from this gross receipts out of the profession. The profession related expenses could be salary (if you have engaged someone), rent for the premises from where you are carrying out your profession, internet expenses, mobile expenses, official travel, lunch expenses (met officially) etc. Here is how we determine her taxable income from business :
|Particulars||Amount (in Rs)|
|Internet and mobile||25,000|
4. Tax FilingAs a professional, the form applicable to you is ITR 3. You will be liable to file your return on or before 31 July of the Assessment Year unless you are subject to an audit under the Income-tax Act.
5. Applicability of Tax AuditYou would be liable for carrying out a tax audit if your gross revenue from profession exceeds Rs 25 lakhs during any given financial year, Failure to get your books audited can attract a penalty of upto 0.5% of your gross revenue of Rs 1.5 lakhs whichever is lower
6. Presumptive TaxationA professional having a gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax wherein he can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on such income. Once he opts for this scheme, he cannot claim any of the profession related expenses as a deduction again. Further, anyone opting for this scheme is not bound by the mandate of maintaining books of accounts too. While he is also liable to file his return by 31 July of the assessment year, he must file his return in ITR 4. Further, he will be liable for tax audit in a scenario where he offers income lesser than the income arrived at on presumptive basis and also his income exceeds the basic exemption limit. Here is a simple example to help make you understand when this scheme can be opted for: Example: Rakesh is a practicing doctor and has an annual income of Rs 30 Lakhs in financial year 2017-18. The actual expenses incurred by Rakesh for running his practice amount to Rs 3,00,000. The tax liability for Rakesh for FY 2017-18 is as follows:
|Particulars||Tax liability with Presumptive taxation||Tax liability without Presumptive taxation|
|Income||Rs. 30,00,000||Rs. 30,00,000|
|Expenses||Rs. 15,00,000 (50% of income is eligible for deduction)||Rs. 3,00,000|
|Taxable income||Rs. 15,00,000||Rs. 27,00,000|
|Tax liability||Rs. 2,62,500 (excluding cess)||Rs. 6,22,500 (excluding cess)|
7. Freelancers IncomeFreelancers who are into any of the specified or non-specified professions, get covered under the same rules as applicable to any other full-time specified or non-specified professional be it rules of computation of taxable income and tax liability, maintenance of books of accounts, presumptive tax, return filing etc.
Section III: Others
1. Glossary of TermsThe Indian income tax law runs into hundreds of pages. There is no good reason for you to spend precious time finding your way through it. Here’s a little glossary to help you master some basic tax terms which can be very handy while filing your tax returns.
Books of accountsBooks of accounts means a record of all income, expenses, assets and liabilities of your business. These financial records are essential for understanding the performance of your business. These may be compulsorily required in some cases.
DeductionsIncome from all the five heads is summed up and is called gross total income. From this gross total income, deductions can be claimed. These deductions reduce your total tax outgo since they lower your gross total income. Investments such as PPF, NSC or certain expense like life insurance premium, interest on education loan, medical insurance are allowed as deduction from your gross total income.
DepreciationWhen you purchase a capital asset, the benefit of such an asset is usually expected to last more than a year, such assets are ‘capitalized’ and not charged to expenses when they are bought. Every year a small portion of its cost is expensed and is allowed to be reduced from your income. This expense which is charged every year is called depreciation.
Tax Deduction at Source (TDS)Persons responsible for making payments have to deduct tax before making payment. The tax department wants payers to deduct tax beforehand and deposit it instead of waiting for you (the recipient) to make the tax payment yourself. The recipient of income receives the net amount (after deduction of tax at source). The recipient adds the gross amount to his income. TDS is adjusted against final tax due, since it is tax already deposited on the recipient’s behalf. TDS ensures steady flow of taxes for the government.
Advance TaxAdvance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as ‘pay as you earn’ tax. These payments have to be made in installments as per due dates provided by the income tax department.
Form 26ASForm 26AS has all tax related information of your PAN. It shows how much tax has been received by the government against your PAN. It includes TDS, tax directly deposited by you, refunds made to you etc. You can understand how to view and download your Form 26AS
Tax auditTax audit is a review of your financial records by a Chartered Accountant. Your books must be audited if:
a. You are a professional earning gross receipts exceeding Rs.50 lakhs
b. A Business owner with an annual revenue of over Rs.1 crores
c. You have opted for presumptive taxation, you declare your income below the prescribed percentage but your total income exceeds the basic exemption limit of Rs. 250,000
Digital SignatureWhile filing the audit report, both the CAs signature as well as yours need to be included. For this, you must get a digital signature. Digital signature certificate come with validity of one/two years.
Defective return notice under 139(9) for freelancersWhen you file an income tax return using the ITR-3 Form, and you have ticked against “Are you liable to maintain accounts under section 44AA” but have failed to provide full details in P & L and Balance Sheet sections in the return, your return would be treated to be defective under Section 139(9)
List of deductible and nondeductible expenses
- Rent for individual or shared office space
- Work-related meal and travel expenses
- Advertising, promotional and printing expenses
- Depreciation on assets such as laptops or computers. See Income Tax Department’s list of depreciation rates
- Income tax return filing fees paid to private platforms like ClearTax
- Travelling expenses for professional work
- Conveyance expenses
2. Frequently Asked Questions
What is the due date for filing of return of income by an individual carrying out a business or a profession?An individual carrying on a business or profession must file his return of income on or before 31 July of an assessment year. If he is subject to tax audit, he can file his return anytime on or before 30 September of the assessment year. These due dates apply in the normal course unless there is an extension of due dates announced by the Central Board of Direct Taxes (CBDT).
When will a businessman or a professional be subject to tax audit?In the case of a businessman, if his total turnover from business exceeds Rs 1 crore, he is liable to an audit under the Income-tax Act under Section 44AB. In case he is a professional, if his gross receipts exceed Rs 25 lakhs, he is liable for a tax audit.
I run a small business with a turnover of about 30 lakhs on an average every year. Do I have to maintain accounting records?Yes. If your turnover from business exceeds Rs 25 lakhs in any one of the immediately 3 preceding years, you must maintain books of accounts. Not doing so can attract a penalty of Rs 25,000.
I have opted for the presumptive scheme of tax. Should I still pay advance tax?If you have opted for the presumptive scheme of tax, you may not be liable to pay advance tax every quarter but you must ensure you are paying all your advance taxes on or before 15 March of the concerned financial year. Further, any taxes paid before the 31 March will be considered as advance taxes only.
Can a person opting for presumptive scheme of tax claim any further expenses from his gross income?No. Once a person declares the prescribed percentage of his gross receipts or turnover as income, he cannot once again claim any other expenses as a deduction.
Should a person offering income presumptively maintain books of accounts?No. A person opting for presumptive income scheme under Section 44AD, 44ADA, 44AE etc, need not maintain any books of accounts.
Can I opt out of the presumptive scheme if I feel it does not work well for me?Once you opt for this scheme, you must follow it for the next 5 years. Opting out of it for any 1 year during these 5 years will make you ineligible to again opt for it the 5 years immediately following the year when you opted out of it. For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2016-17. For AY 2017-17 and 2018-19 also he offers income on basis of presumptive taxation scheme. However, for AY 2019-20, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2020-21 to 2024-25.