Choosing what kind of business to start, how each company pays income tax, and the ups and downs of each play an essential role in an entrepreneurs’ journey. Each process is different, and the type of business tax can significantly impact your business’s tax return.
Here we explore how different company types in India pay income tax.
Flow-through (Mobile) Entity Taxation
Some companies transfer their profits and losses to the owners. The owners pay income taxes based on their share of the taxable income. These are known as flow-through (mobile) taxes. Small businesses and start-ups are often considered flow-through business units. Big companies do not fall in this category.
Sole Proprietor Business Income Tax
Sole Proprietor is the simplest form of doing business in India. If you are self-employed, you are the sole owner of your business unless you are registered under another business unit. In India, sole proprietorships are not taxed as separate legal entities. However, the business income of a sole proprietorship is deducted from the total income from personal expenses, tax deductions and other related income (if applicable).
Higher taxes harm lowering tax returns, and over time, these taxes slow the accumulation of capital needed to grow the business.
Private Limited Company Tax Rate
In finance budget taxation of a Private Limited Company, tax is divided into two categories:
As Turnover above 400 Cr, and
As Turnover below 400 Cr
The income tax rate on private limited companies stands at 25% for midsize companies. The tax rates for this type are the lowest in India, at 15% for manufacturing companies and 22% for companies other than manufacturing.
Partnership Business Tax
A partnership is an outcome of two or more individual taxpayers coming together for business purposes and sharing the profits and losses of the business. In India, the registration of a Limited Liability Partnership (LLP) is the preferred form for entrepreneurs as the association brings together the interests of companies and partners in one organisation.
A profit tax of 30% is levied on associates and LLPs. If the subsidiary’s income is higher than one crore rupees in a financial year, a 10% extra tax also needs to be paid. Capital gains resulting from the disposition of assets by a company are taxed following Section 112 of the Income Tax Act.
Corporation Income Tax
Under the Income Tax Act, domestic and foreign companies must pay corporate tax in India. While a domestic business is taxed on its universal assets, a foreign corporation is only taxed on the income made within India, i.e. is being gathered or received in India.
A corporation is an independent taxpayer and pays income tax at the corporate tax rate. The owners of the company are shareholders and receive income in the form of profit. The shareholders pay tax on this income equal to the gain. Companies pay taxes on their most considerable income, while shareholders pay taxes on recurring profits.
Filing Tax Return – Forms and Requirements
Deadline for filing tax returns
Companies, including foreign companies, must file their tax returns before October 30 of each year. Even if the company is registered for the same tax year, it must file a tax return by October 31. For the 2019-2020 fiscal year (AY 2020-21), the deadline was extended to November 30, 2020, due to the COVID-19 pandemic.
Tax return forms to be registered by the company.
ITR 6: All the companies except organisations claiming reduction under section 11 need to file their return using Form ITR 6.
ITR 7: All the companies listed under section 8 of the companies act, 2013, must file their return using Form ITR 7.
Tax Audit Income tax
In tax audits under the Income Tax Act, businesses must verify their accounts and submit the auditor’s statement along with the tax return to the IT department. This check is called a Tax Audit. The certification company must submit this tax audit report before September 30 of each year.
In a nutshell, what should you go ahead with?
In India, entrepreneurs majorly prefer to go with either the Private Limited Company or LLP business format for their companies due to various associated benefits, including tax aids. These models are popular among start-ups because of their multiple features, like issuing shares to potential investors and sharing risk, to name a few.
But, the final decision lies with you, and you should take the call in direct consultation from industry experts for the best results.