Income Tax – Dutch Uncles

What are the different types of business ownership?

Pranjal Pravin — Tue, 01 Jun 2021 11:35:04 +0000

Whenever we talk or discuss about business, we usually start with terminologies like the vision, the mission of the business, how they operate, what are the different levels involved and so on.

But before jumping into the land of starting a business or even owning one, we not only need to be aware of the above or even the geographic and political factors but also ask ourselves the main question, what are the different types of businesses?

The different types of businesses give an outline of a structure to the ownership world and without a structure, anything could be read like an open book ready to be disassembled like a rusty machine.

These businesses might be owned by a single person or a small group of people or even run by a large charitable organization with a notion to help. The point of differentiation is not just the amount of people but also the legalities that follow while being a part of them.

This legal and ownership structure of a business determines various factors- from the taxes that the business needs to pay to the profit distribution, the responsibilities that the owner or multiple owners have, ultimately determining the paperwork that the businesses have to go through to finally set up.

So, what are these different types of business ownership and how do you determine which is the right one for you?

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The different types of businesses give an outline of a structure to the ownership world and without a structure, anything could be read like an open book ready to be disassembled like a rusty machine.

Sole Proprietorship or Single Ownership

As the name suggests, the ownership of this kind of business falls in the hands of one single person, who is deemed as the sole or the final decision-making authority for the business. Here, the owner is the one responsible for all the assets and liabilities including both personal and professional ones.

With the profit or loss completely being handled by them, an advantage to being a sole proprietor is that these kinds of businesses are easy to set up since you’re the ultimate decision-maker but on the other hand you have to be responsible for all the liabilities and debts at any given point of time. Looking at the positives, the expenses to start a single ownership business is majorly minimal in the beginning and it is easier and flexible for the owner to operate.

Now, this does not mean that they should work alone. Like any other organization, they can always employ people to expand their businesses but any responsibilities from hiring to firing to giving profit to bearing the debt, to raising funds, everything falls on the head of the owner.

Examples of sole proprietorship or enterprises run by a single owner could be a small shop to sell handmade goods or an auto repair shop, a working plant to provide goods carved from wood, etc.

Given the above examples, the single ownership businesses have their fair share of ups and downs but given the advantages such as minimum legal restrictions, enjoying all the profit and also managing the raw materials and manufacturing methods to yourself, these assurances give a good deal of motivation and incentive to flourish.

Partnerships

Moving on to the next type of ownership we have Partnerships. These kinds of businesses involve two or more people as the owners of the business. When the time for the owner comes to realize that the potential for their business is much more than they could handle and they might not be in a position to hold all the responsibilities and duties that come to handle a business, then comes the entry for a co-owner or co-owners depending on the decision and situation.

Now, these partnerships could be of two types:

General partnerships

Running on a similar idea of single ownership, where two or more people with the same vision and mission come together through a legal contract to grow a business. Every partner here can act as a sole owner and have full control of the business along with owning full rights to all the profits and debts sustained by the business. The incentive for success becomes high as large capital is invested from both sides and the firm can hold better talents and skills.

Along with that, if the business goes into loss, there’s more than one person to handle the situation and also attach tax advantages with the business. Examples of a general partnership could be retail trade organizations, small engineering firms, law firms, medical clinics, etc.

Limited Partnerships

A form of the partnership business, here although the partners share the profit generated from the business they can’t interfere with the management or decision making of the firm. As the word suggests, limited partners have their authority limited to the amount of investment made into the business.

Depending on the type of situation and legal contracts, these types of business are easier and also less costly so all the investors and lenders who were earlier hesitating to invest in the business have now an incentive to go ahead without much of a risk.

Joint-stock organization/Companies

There are two different types of Joint-stock organizations:

Private limited companies

The number of members for this type of business ranges from 2 to 50 excluding any employee or ex-employee shareholders. The money or capital is collected from private partners where all of them might not be active but these types of organizations restrict the right to transfer shares and avoid the public to get ownership on shares or debentures.

Although there isn’t a need for consent of directors in these types of businesses and also, they don’t need any certificate from a registrar for the initiation of business but they do require to hold a general meeting at certain periods to discuss its profit and loss generation.

They also need to send a certificate to the registrar of the companies along with the returns stating that they don’t have more than 50 shareholders on their account.

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With a democratic form of ownership, these organizations promote cooperation and mutual belief and understanding of self-help.

Public Limited Companies

Unlike private ownership, the money in here is collected through the public in small amounts of shares having a low face value. The public limited companies have to file with the registrar of Joint Stock Companies several documents. Some of them involve the consent of directors, list of directors, director’s contract etc. where they can start the business only once they receive the certificate.

These businesses are responsible for holding a statutory meeting and issuing a statutory report to all the members and also the registrar within a given time. With no restriction on the transfer of shares, the company is liable to get its account audited every year by the registered auditors’ and also hold a general meeting every year.

Since the shares are transferable, public limited companies have a huge potential to raise a good sum of money and also acquire the services of specialists. Some examples of a public limited company would be Steel mills and Fertilizer factories.

Cooperative Societies or Organizations

Containing a mix of features from both the large partnerships and some from corporations, here the members of the cooperative societies buy shares on their own and then the amalgamated profit gets distributed among its members. Each member of the society is given the right to vote only one time so that the concentration of power does not fall into few hands.

These kinds of organizations aim to provide goods and services to their members at a cost and therefore it is deemed as a kind of voluntary, democratic ownership which is usually formed by a couple of motivated members who believe in obtaining necessities of everyday life at rates lower than those of the market.

With a democratic form of ownership, these organizations promote cooperation and mutual belief and understanding of self-help. With no one man making huge profits, the monetary help for these businesses can be secured even from the government.

Examples of Cooperative Societies include Consumer cooperatives in retail trade or producer cooperatives for buying and selling items such as dairy products, grains, fruits, etc.

Public Sector Companies

There are three different ways of managing a public enterprise:
Either they are owned by the state, or they are managed by the state or they are both owned as well as managed by the state. Here enterprises fall into the hands of the government as they are the ones to control and produce the supply of goods and services which are required by the society.

These public sector companies open the doors for those industries which are in dire need of a huge amount of capital and don’t have enough resources to flourish under the umbrella of the private sector.

The consumers get the befit of greater, better and cheaper goods and also encourage the growth and nourishment of the under-developed regions of the country. Although there could be sometimes too much interference by the government and also delay in the decision-making process, at the end of the day necessities like raw materials, fuel, power and transport get made easily available to them.

Private Sector Companies

Last but not the least, private sector companies. As the name suggests, private sector companies are exactly the opposite of how the public sector companies operate. One of the points that stand out for them is that they do not indulge themselves in businesses where profit margins are low or where there is a huge risk involved.

Run by various businessmen from various sectors who possess an in-depth knowledge of the sector they come from, the profitability factor along with efficiency is always focused on very high levels along with a quick decision-making capability as compared to the public sector companies.

As there is minimal to no interference from the government, sometimes the situation leads to having a concentration of profits only in a few hands and also over-exploitation of the labour involved which results in an unbalanced growth of industries.

While looking at all these kinds of businesses, choosing the right one depends on certain factors, such as how much capital you have, how you want to handle the profit and loss management of your organization, what legalities and paperwork would be involved, so and so forth. It is indeed a tough and scary step for any entrepreneur.

There are equally compelling benefits and also hindrances that could be worrisome but the first and foremost step for any budding entrepreneur should be to educate themselves and weigh the pros and cons before stepping onto the world or business ownership. Ultimately, it requires a good amount of knowledge, confidence and support to take the first step and then eventually figure out what could be the right type of business to go for.

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What is a speculative business?

Pranjal Pravin — Sun, 30 May 2021 10:35:04 +0000

Before jumping on to what a speculative business means, let’s try and understand our income tax provision. If you’re a serviceman/servicewoman or a businessman/businesswoman doing that 9 to 5 or putting your all to grow that business and earning your bread and butter through that organisation then the income that you earn has a liability of undergoing the cycle of taxing which is processed by the government. As a taxpayer, any kind of income taxed falls under five major categories.

5 Heads of Income

Income from Salary– The salary that you earn at the end of every month is taxed at a certain tax bracket depending on the level of income you earn.
Income from house properties– If you have a single or few houses in your name then be ready to not only shell out the monthly EMI or instalment but also a certain level of money for the tax slab. After all, you’re going to reap the benefits of the house as an asset and every asset holds a major value in the eyes of the government.
Profits or gains of business– There’s an unprecedented amount of income that you earn from running a business and with certain guidelines from the government of the country you operate that business in, your business income is liable to be taxed at the end of every financial year
Income from capital gains– This defines the tax that is operated on all the income that you earn from the investment you have done at various places including mutual funds, share markets or even bitcoins.
Income from other sources– Finally there might be an income that you might be earning from running an Instagram page and getting good deals or consulting a business apart from your daily job. As with any other income, this side hustle of yours also falls under the bracket of getting taxed.

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India’s income tax provision does not define what speculative business is but rather it defines what a speculative transaction is.

Now when we are through with the five different kinds of tax categories, it’s time to recall tax filing of which of the categories has been the easiest and which has accounted for a major brain as well as paperwork. When it comes to the classification of income from your business or profession, it is much easier for you to get the required paperwork for this category as compared to defining the income from capital gains.

Some say that the income earned on the capital gains must rely on the amount of investment and frequency of transactions or gains per transaction. And if the transactions fall under the category of business, then it’s further categorised into 2 different classifications of being speculative and non-speculative.

Understanding a speculative transaction

India’s income tax provision does not define what speculative business is but rather it defines what a speculative transaction is. According to Section 43(5) of the Income-tax Act, the term speculative transaction implies a transaction in which the contract which includes the purchase or sale of any commodity like stocks and shares is settled periodically or eventually settled otherwise than the actual delivery or transfer of the commodities or scripts.

Simplifying the above words, let’s take an example of Intra-day trading. Intra-day trading refers to the trading of shares within the same day. So, considering this example, there is no delivery as the shares enter and exit from a given trading account on the same date without getting a chance to enter the DEMAT account.

As the delivery does not take place, the above transaction falls under the category of speculative transactions. To further simplify you could call a speculative income or transaction the one where the outcome does not depend on your hard work or skills or your experience and the practice that you have. It rather completely depends on your luck or chance factors.

Intra-day trading might be a sophisticated way to term the speculative transaction, but to further understand you could also deem the speculative transaction as the one which gives you an income from gambling or casinos or sometimes even a coin toss for that matter.

Just like any business, there are always exceptions to playing this game. So, for your ease, to deem any transaction as speculative, you need to have a clear understanding of what is and what is not included while considering a transaction speculative.

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The task of calculating a speculative income and understanding the whereabouts of the business is no doubt risky and complex to fathom.

What cannot be termed as speculative business?

Hedging contract concerning raw materials or merchandise

If you’re a businessman/ businesswoman in possession of raw materials for manufacturing and merchandise to be sold, it is highly likely that with time, the value of the raw materials will fluctuate. So, to save the price fluctuation between the period at which you bought your raw materials and sold them, you get into a contract. This particular contract is for saving your goods and not a speculative transaction.

Hedging contract in the aspect of stocks and shares

In a similar fashion to the above example, there are a lot of price speculations which are expected when you hold a certain number of stocks and shares and to seal the loss incurred because of that with your dealer or investor you get in a contract. Reiterating the same, that this contract is not a part of the speculative transaction.

Forward Contract

Forward contract here refers to a situation in which a member enters into a forward market or stock exchange in the course of any transaction like jobbing (all transactions are squared off during the same day) or arbitrage (purchase of commodity or security in one market for immediate sale in another market) to guard against loss which may arise in the ordinary course of his/her business as such member. To ease the definition of a forward market, this typical market refers to an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. This again is not deemed as a speculative transaction.

Trading in derivatives

As the name suggests, when your transaction is carried out electronically by the recognized brokers as defined per relevant statutes, the given transaction is supported by a time stamped contract note. This note indicates a unique client identity number and PAN (Permanent Account Number). The given transaction in respect of trading in derivatives are referred to in Securities Contracts (Regulation) Act, 1956 and carried out in recognized stock exchanges and not deemed as a speculative transaction.

Trading in commodity derivatives

Finally, a type of transaction that follows the same rules like the one given above and is very much eligible is carried out in respect of trading commodity derivatives in a recognized association. This association is chargeable to commodities transaction tax mentioned under Chapter VII of the Finance Act, 2013.

What happens when a speculative transaction takes place?

Taking a scenario where a taxpayer is involved with a lot of businesses along with a speculative one, the speculative business of this taxpayer will be deemed as a separate entity from any other business carried out by the taxpayer.

This helps in calculating the loss incurred by the speculative business or transaction. Section 73 of the Income Tax Act states that the losses from speculation business can only be set off against the profits of the speculative business which is quite unlike the loss from any other business which can be set off against the profits of other businesses.

Noting further points, the losses from a speculative business can be carried forward to a subsequent year, can only be set-off against the profit and gains of any speculative business in the respective subsequent year. For this given condition, it becomes imperative for any taxpayer to distinguish between the gains or losses from a speculative business to that of other businesses.

Another important thing to note is that the loss from the speculative business cannot be carried forward for a period greater than four assessment years beyond the year in which the loss was incurred. Also, if there is any expenditure and depreciation involved in the process of scientific research, if the depreciation or capital expenditure is carried forward in the speculative business then it is required to be set off first.

Can a single transaction constitute speculative business?

Well according to explanation 2 of section 28, a single transaction is insufficient unless there is a systematic or organised course of activity or conduct on the part of the assessee, it is clear that a single transaction is not possible. A single transaction done instead of actual delivery is not sufficient to stand by the explanation 2 of section 28 of the Income Tax Act, 1961 and there should be a plural set of speculative transactions. So, given the rules again, a single transaction cannot be deemed as a speculative transaction.

The takeaways

If you have to calculate the turnover for a speculative transaction or business the simply add both the positives and the negative differences to get the final turnover
As the income earned from a speculation gain is majorly through intra-day trading, Income from your speculation gains is taxed at the given normal rates.
Speculative transaction or business no doubt involves very high risk, but if the luck is in your favour, it also gives an equal amount of great returns. All in all, the motive should be to gain the maximum advantage of the fluctuations that happen in the market.
Always take care of what is and what is not included in a speculative transaction or business. Examples like hedging contracts or trading derivatives could be tricky as sometimes they confuse you as a speculative transaction, but keeping a note of these points and further educating yourself about the same helps in the long run.

The task of calculating a speculative income and understanding the whereabouts of the business is no doubt risky and complex to fathom. The taxpayer involved with all these transactions has to take care of several things and rules and regulations to distinguish their income from a normal to a speculative one. Ultimately it depends that no matter what the business, the time and money invested in is bringing you a good return and profit given all the legalities.

There will be many times where mistakes will be made and given rules and regulations will be misunderstood or misinterpreted depending on the type of business and gains involved. To avoid this, one thing has to be kept in mind, that any taxpayer should always be well versed with the clauses and continuously educate themselves with the given rules or consult someone who deals with these transactions daily to not fix themselves in unwanted tax transactions.

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How Does an Entrepreneur Pay Taxes?

Bhuvana Rajaram — Fri, 30 Apr 2021 09:30:04 +0000

“The hardest thing in the world to understand is the income tax,” said the great Albert Einstein. If he could not understand the tax labyrinth, who could possibly master it? On that note we explore below what goes on in the Indian start-up scenario when it comes to paying taxes.

As an employee your taxes are straight forward, you receive your paycheck after paying taxes. However, as an entrepreneur you receive full payment and then pay the taxes. And as an entrepreneur you have the advantage of making use of the several tax benefits schemes that reduce your tax outflow. To begin with, here is a roster of prominent tax saving features for entrepreneurs which you can use for an intelligent conversation with your auditor.

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As an entrepreneur you have the advantage of making use of the several tax benefits schemes that reduce your tax outflow.

Prominent tax saving features for entrepreneurs

Family First

Hiring family members in key positions is an advantageous proposition. And if these members do not have other sources of income, then they can be paid Rs 2,50,000 a year and they are not liable to pay tax. These salaries can be accounted as a cost to the company, thereby the taxable income is reduced and as a result the tax pay out as well.

More Marketing

It is given knowledge that marketing efforts propel the business forward and afford you expansion opportunities. Also, digital marketing has gained traction and businesses can leverage this to increase overall profitability and mark these marketing expenses as cost to the company, as these expenses qualify for tax deductions.

Travel Time

If you are travelling on business, then it would be worthwhile to expense it to your company account. This is considered a business expense and can be deducted from the taxable income of the company.

Utilize Utilities

Tax burden can be brought down significantly by some of the basic utilities that every business spends money on – Preliminary expenses which are incurred during the setup of the entity. Convenience expenses which are incurred because of phone bills, vehicles and salaries. If you are in a home office set up, then electricity and internet charges are also deductible from tax.

Health Hazards

The medical insurance premiums of up to Rs 25,000 is claimable for tax deductions under Section 80D of the Income Tax Act, 1961. It includes your spouse, children, and parents under this. The caveat here is that this is not applicable if you are a start-up owner in parallel to being a full-time employee where the employer provides medical insurance coverage.

Give Good

Tax exemptions are applicable to when you make donations to the registered charities and funds such as the PM’s relief fund. In fact, you can also donate to a recognised political party to claim tax breaks.

Happy Homes

If you have a housing loan, you can claim tax deductions of up to Rs. 1,50,000 a year under Section 80C of the Income Tax Act. Kindly link your PAN with the company.

Downward Depreciation

Companies (under Section 35AD) installing new equipment and machinery that have been installed for over a year can claim up to 20% additional depreciation, in addition to the regular depreciation in the year they were put in use.

Cash Crazy

If you are still stuck with cash disbursements to employees, please stop. As this increases your taxability and you are bound to pay more taxes. Adhere to digital transactions and adopt healthy tax saving practices.

Tax Compliance

Under the Income Tax Act, the payers (entrepreneurs) are liable to deduct a TDS at the rate of 10% for availing any service from an individual or a corporate if the payment exceeds Rs. 30,000 annually. In case you fail to deduct the same the entire amount paid will not be considered as an expense to the entity.

Are you an Eligible Entrepreneur? Here is a Checklist for Self-Assessment

Take this reality check to see if you are an entrepreneur in the real sense of the term according to the Income Tax department.

How old are you? You must be less than 10 years of age since formation.
How rich are you? Your turnover has not crossed 100 crores in any previous years.
What are your goals? You must be working to promote innovation, development of employment opportunities and wealth creation.
How were you formed? You must not be in existence due to a breakup of a company already in existence.
Which of the below best describes you?
Sole
Proprietorship
Partnership
LLPCompany
What is your identity?
Do you have a PAN? This is your unique number allotted by the Income Tax Department.
Do you have a TAN? This is required for TDS related compliances.
Do you require a GST
Required if income exceeds 40 lakhs and above for businesses engaged in goods.
If income exceeds 20 lakhs and above for businesses engaged in services.
Do you have a professional tax registration?
Do you have a shop and establishment license?
Do you have industry specific regulatory approvals?
Do you have an Import Export Code (IEC)? Necessary if your entity is involved in the import or export of goods and services.

If you have ticked all the above and have the necessary paperwork in place for qualifying to be as an eligible start-up, then you are entitled to enjoy the following tax benefits:

Initial Stage Waiver

If your entity has been incorporated between 1 April 2016 to 1 April 2021, then you can avail deduction of 100% of profits for a block of 3 years in the first 7 years of incorporation.

Angel Tax Waiver

When a domestic company wants to issue shares to public at Fair Market Value (FMV), the valuation is determined by the merchant banker based on the future cash flows of the company. In case the company decides to issue shares at a higher price than the determined FMV, such excess is treated as angel tax. With the requisite declaration with DPIIT and subject to certain conditions, eligible start-ups are exempted from Angel tax.

Set Off Waiver

The Income Tax laws provide for carry forward and set off of business loss. Meaning the same can be reduced from the profits of the future years. An eligible start-up is not taxed for the losses incurred in the first 7 years, provided the shareholders holding shares in the year of loss continue to hold shares in the year of set off.

Capital Gains Waiver

Long term capital gains from transfer of residential properties are exempted from capital gains tax if the consideration that it is invested in the equity shares of the eligible start-up.

ESOP Waiver

Eligible start-ups issuing ESOPs to its employees on or after the 1 April 2020 enjoy tax relaxation on deduction of tax on such ESOPs.

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Tax burden can be brought down significantly by some of the basic utilities that every business spends money on.

Types of Entrepreneurship and Respective Taxation

When it comes to entrepreneurship, which legal structure should your business take is a question you will have to think about. Not only is this important for your business to function, but it also has attendant tax benefits. In India, the three basic types of business structures that exist are:

Sole Proprietorship

Is a small and independent business owned by an individual, and they are unregistered and host hassle free operations. They are popular across the unorganized business sector and comprises merchants and traders with moderate incomes.

The taxation for sole proprietorship is conducted along with the business owner’s personal taxes. Therefore, the income generated from the business is added to the owner’s income after taking into consideration the deductions for tax, business expenses from the gross amount. They are entitled to enjoy the sole proprietorship tax deduction as per prevailing IT rules and upon the slab rates available to the taxable income.

Partnership firms and Company (Pvt. or Public)

Is a firm having more than one person conducting business under one entity and there are both registered and unregistered partnership firms. A registered partnership firm is one that is registered with the Registrar of Firms and has received a registration certificate for the same. And those that do not have a registration certificate from the Registrar of Firms is an unregistered partnership.
The taxation for partnership firm is required to pay the following tax percentages:

30% income tax – 12% surcharges where taxable income is above one crore rupees

Up to 12% on interest of capital is allowed

Health and Education Cess 4% of tax including surcharges

And unlike sole proprietorship the partnership firm has a different legal identity from that of its partners. Also, whether the partnership firm is registered or not they have to comply with tax norms. And they must also pay the alternate minimum tax which cannot be less than 18.5% of the adjusted total income.

Limited Liability Partnership (Hybrid of partnership and company)

With the rapid business growth across India, and the rise of the service sector there arose a need for a new form of organization that had the best of both Sole Proprietorship and Partnership. And this gave birth to the LLP which is a separate legal entity, and it stands separate from its founders. It has a minimum of two partners with no limit to the maximum number of partners. This type of hybrid organization is fairly easy to form and enjoys less restrictions and compliance as mandated by the Government.

The taxation for LLP is at a flat rate of 30% on its total income. There is a surcharge of 10% where total income exceeds one crore rupees. The amount of income-tax and the applicable surcharge shall be further increased by education cess and secondary and higher education cess calculated at the rate of 4% of such income-tax and surcharge.

Understand how to file your company’s ITR with these simple steps

Engage a practicing Chartered Accountant to audit your Financial Statements. This is mandated by the Income Tax Act Under Section 44AD.

Computation of Income Tax is the next crucial step. Calculate the difference between the total amount of Income Tax payable and amount paid as Advance tax or Tax deducted at source.

If the amount paid is greater than total income tax – get the refund.

If the amount paid is lesser than total income tax – pay the difference.

Obtain the Tax Audit report from the auditor who will provide the same in Form 3CA along with other details in Form 3CD.

File ITR once the auditor submits the audit report.

E-Filing: The entire filing process can be done only through the e-filing portal of the Income Tax website. The authentication of your signature is carried out through Aadhar Card and Bank Account numbers. Once your return is processed you will receive an e-assessment order from the IT department which will be notified to you via email. The refunds if any, are processed and dispatched within a reasonable timeframe. Your grievances can be registered through the same portal and you can also verify the tax deducted from various entities in Form No. 26AS, which is automatically populated in your IT return.

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Do I Need to Register for VAT or GST to Start a Business?

Anju Nambiar — Sat, 24 Apr 2021 11:35:04 +0000

Goods and Service Tax (GST) was introduced with a vision to make tax compliance simpler and easier while starting a business.

Is GST registration vital?

GST registration is mandatory only if your annual turnover is above 20 lakhs which is not the case for entrepreneurs just starting a business. GST has simplified the process of tax compliance for start-ups. Ever since it came about, start-ups need not file a separate VAT and service tax. Instead, they need only file one GST.

Start-ups and small businesses thus are not burdened with the looming dangers and fears around tax compliance.

Do you need VAT?

Value-Added Tax (VAT) is a tax levied by the Central Government for the sale of products and services when the end customer purchases. VAT registration is simplified just like GST registration, both of which are done online. Entrepreneurs preferred VAT registration over other taxes like sales tax.

Currently, VAT registration and filing of VAT is mandatory for businesses once they cross the annual turnover threshold of 5-10 Lakhs. The amount of VAT that needs to be paid depends on the state which the business is registered in. The VAT registration act of India mandates all business organisations and manufacturing units to be registered. If you are a manufacturing or trading start-up and your annual sales have exceeded INR 5 Lakhs, then registration and payment of VAT is compulsory.

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If you are a small business or about to start a new business, then you are exempted from paying GST or VAT.

The difference between GST and VAT

GST has replaced VAT since July 1, 2017. When VAT was in effect, it was a ‘cascading effect of taxes’ on the economy and GST has put an end to it.

‘Cascading effect’ refers to a product tax that takes on additional taxes with every step that it moves towards the end consumer. This ‘tax on tax’ was severely affecting the economy and was very tedious for new start-ups. With GST, start-ups can see less compliance issues as opposed to what they were experiencing with VAT.

What’s in it for me?

If you are a start-up registering for GST, the complete registration process is online. There are no long queues, and no endless waiting around for lunch breaks in Government offices. If you are an e-commerce start-up, you no longer need to worry about confusing compliances that were in place.

As a start-up, you can register for GST which has replaced VAT and you will see more streamlined compliance for your start-up.

If you are a small business with a turnover between 20 lakhs to 1 crore, then you have a scheme which will allow you to pay lower taxes. This optional scheme, called the composition scheme, will give you relief from being overburdened with tax if your business is newly established.

This means that if you are a small business or about to start a new business, then you are exempted from paying either taxes.

The only challenge is for the manufacturing sector. Before GST, start-ups from the sector had to pay excise duty only if the turnover was more than 1.5 crores. But after GST, the limit was reduced to 20 lakhs which is definitely a burden for start-ups in this sector. However, the benefits outshine the burden.

Foremost, India will become one single market where manufacturing goods can move freely about. And second, manufacturing start-ups will have less compliance issues than before.

The bottom line is that when starting a business, you may register for both GST and VAT, but your start-up is exempted for paying either until your annual turnover crosses the threshold (20 lakhs for GST and 5-10 lakhs for VAT). Also, you need only file GST since it has replaced VAT as single compliance for business.

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How Do Businesses Pay Taxes?

Aakash Sharma — Thu, 22 Apr 2021 07:35:04 +0000

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).

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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.

The post How Do Businesses Pay Taxes? appeared first on Dutch Uncles.

How are Entrepreneurs Charged Income Tax?

Joseph Varughese — Tue, 20 Apr 2021 09:35:03 +0000

One of the important elements that an entrepreneur needs to decide on during the business formation stage is the form or structure of the business. Entrepreneurs identify the relevant business organisation structure based on several factors such as ease of commencing operations, compliance requirements and the costs involved, connectivity and accessibility, availability of required skill set, agreement with other members and need to raise funds among others.

Tax implication is one important element that varies with the business structure. The tax rules differ depending on the business form and hence it is important that you evaluate the pros and cons before finalising the business structure.

Before we move further on this subject, it will be ideal if we glimpse through certain basic concepts of income tax for readers, if any, who don’t have sufficient exposure to the basics of the income tax. We will touch upon a few fundamentals like person, residential status, legal entity, heads of income, financial year, assessment year as defined in Income Tax laws.

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A legal entity is a concept that is about defining business as an entity different from its owners. For income tax purposes all business entities except proprietorship are considered as separate legal entities.

Some Income Tax basics

The word person in Income Tax has a meaning entirely different from the common parlance and is very wide and broad under Indian Income Tax Act and embraces in itself Individual / HUF, Company and Firm. Though the definition of person also includes Association of Persons or Body of Individuals, Artificial Judicial Person and Local Authority, we will confine our discussion to the common category of individual, company and firm here.

The concept of the residential status of a person is about defining a person as resident or resident not ordinarily resident or non-resident. We will not get into more details of its definitions and how status impacts tax liability in this discussion. We will consider only residents here. A taxpayer would qualify as a resident of India if she/he satisfies one of the following two conditions:

1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

It is also important to be aware of the various heads of income. There are five main heads of income according to the provisions of the Income Tax in India as follows:

Income from Salary
Income from House Property
Income from Profits and Gains of Business or Profession
Income from Capital Gains
Income from Other Sources

Various provisions and tax rates apply depending on the head of income under which a particular income falls along with factors like person, status.

A legal entity is a concept that is about defining business as an entity different from its owners. For income tax purposes all business entities except proprietorship are considered as separate legal entities. What does it mean to a taxpayer is that income tax is charged to the income of legal entities i.e. business except in the case of proprietorship in which case there is no differentiation between the business and its owner for tax.

In all the other cases, the owners of business will be charged tax for the income they have earned in their personal capacity. For example, the amount received from his / her company or any other company as salaries, sitting fees, consulting fees will be charged to tax in their personal capacities. With the scrapping of Dividend Distribution Tax, the dividend has now been made taxable in the hands of the dividend receiver. Needless to say that income from other sources will also be included as income in individual return.

A financial year, also called previous year, is the year in which the income is earned. Assessment year is the year in which Income Tax Return (ITR) is supposed to be filed and assessed. For example, if the income pertains to the year 2020-21, that is the financial year or previous year. The year 2021-22 is the assessment year relevant to the previous year 2020-21.

How Income Tax is charged to business and entrepreneurs?

Let us examine the tax implications of some major business forms and how income tax is charged to entrepreneurs in different situations.

Limited Liability Partnership or Partnership Firm: An LLC or registered partnership firm is taxed as a separate legal entity different from its partners. In computing the taxable income of a firm any salary, bonus, commission or remuneration that is due to or received by a partner is allowed as a deduction subject to certain restrictions. Where a firm pays interest to a partner, the firm can claim deduction of such interest from its total income subject to a maximum interest rate of 12% per annum.

Any of the above payments made to partners and deductible from the income of the firm to compute its taxable income are taxable in the hands of partners in their individual tax return as per the income tax provisions applicable to individuals at the tax slab rates stipulated in the respective Finance Act. However, the share of profit distributed to partners won’t be taxable in their hands as the profit is already taxed in the hands of the firm before sharing with partners.

Income Tax is charged at the rate applicable to firms (including LLP) for the relevant financial year.

Company: A company is a person having a separate legal entity distinct from the members who constitute it. A company is incorporated as per the provisions laid out in the Companies Act 2013.

The applicable taxes are charged to companies, domestic as well as foreign, as per the provisions of Income Tax. Taxable income is calculated taking various provisions related to recognition of revenue and allowability of expenses into consideration. Expenses are allowed to be deducted from gross revenue based on various provisions of Income Tax which has a very basic requirement that expenses that are deducted must have been incurred for generating the revenue being considered.

Any salary, commission, bonus, allowances paid to directors as per the provisions of Companies Act 2013 are taxable in the hands of members or directors in the capacity as individuals. Dividend, after the scrapping of Dividend Distribution Tax by Finance Act 2020, unlike share of profit of partners, is now taxable in the hands of individual investors or dividend receivers.

Income tax is charged at the rate of 25% in the case of domestic companies having Rs. 400 crore or less in turn over and 30% in other cases. However, there are other provisions like 115 BAA with a lower rate of 22% and Minimum Alternate Tax at the rate of 15%. All the above-mentioned tax rates are basic rates and surcharge and cess will apply as applicable.

One Person Company: One Person Company is a relatively new concept that was introduced in the Companies Act, 2013 to help the solo entrepreneur so that he/she can create a formal company structure without needing a director/partner as is the case with a private company/ partnership. Like a Private Limited Company. An OPC is a separate legal entity distinct from the member who constitutes it.

For taxation, an OPC is recognized as a private company under the Income Tax Act and is therefore subject to the same rate of tax as a domestic company. It is important to note that an OPC can only be incorporated by an Indian citizen resident in India.

Sole proprietorship: A sole proprietorship, as the name suggests, is owned by a single individual. It is not legally recognized as a separate legal entity and is, therefore, an informal structure usually adopted by small businesses. Income Tax does not distinguish between the proprietorship business and its owner and tax is charged and assessed accordingly.

A sole proprietorship is taxed according to the relevant income tax slab applicable to the individual taxpayer and therefore is a more suitable structure compared to an OPC.

Individuals: An entrepreneur is an individual as well as owner or partner or member of a business she/he owns. How business is charged to tax is briefly explained above. The entrepreneur will be charged to tax in his individual capacity for the income he/she receives by way of salary, interest, commission, bonus, dividend, consulting fee etc from the company he/she owns and runs or from other sources.

Individuals are taxed at the slab rates as stipulated in the respective Finance Act. Alternate Minimum Tax: Like Minimum Alternate Tax (MAT) is for companies, as per the Alternate Minimum Tax (AMT) provisions, income tax payable by a non-corporate assessee cannot be less than 18.5% (plus surcharge and cess as applicable) of adjusted total income as defined in section 115JC

In a nutshell, an entrepreneur is subjected to tax in two means, one by way of tax to the business and second by way of tax to the individual.

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In a nutshell, an entrepreneur is subjected to tax in two means, one by way of tax to the business and second by way of tax to the individual

House Property Income, Capital Gain

The income by way of rent from house property the entrepreneur owns will also be subjected to tax under Income from Property. However, if owning and renting properties is the business of an entrepreneur, such rental income will be considered as Income and Gain from Business or Profession. Likewise, what is to be noted is that share of profit to partners is not taxed again in the hands of partners but the dividend is taxed in the hands of shareholders.

Income Tax Reliefs and Incentives

We will take a look at certain reliefs and incentives allowed by the Government for small businesses and startups.

Presumptive Tax

For early-stage start-ups, it may be very difficult to keep a track of all the Sales, Expenses, Depreciation and also keep invoices and records of all these. Therefore, to simplify the manner of computation of Income, the Govt has also introduced the Presumptive Scheme of Taxation wherein a person can disclose his Income as below:-

Income = 50% of value of services provided (applicable for Professionals) if annual turn over does not exceed Rs.50 lakhs
Income = 8% of total value of goods sold (applicable for businesses) if the annual turn over does not exceed Rs. 2 crore, and where the income is credited digitally, the profits will be considered at 6 per cent. It is important to note that if a taxpayer opts for the presumptive taxation scheme, he won’t be allowed to avail of any deduction provided under Section 30 – Section 38.

Conditions you need to meet for opting for a presumptive taxation scheme under Section 44AD.

1. You must file a presumptive scheme for 5 years continuously.
2. In case you wish to file your income as per regular business before the expiry of the said 5 years, you would lose the benefits of the presumptive taxation scheme and will be disallowed this for the subsequent 5 years.

This Scheme of Presumptive Taxation is only applicable to Individual Proprietors, HUF and Partnership Firms but not applicable to Companies and LLPs.

Tax Incentives for Start-ups

The existing provisions of section 80-IAC of the Act, inter alia, provides for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years at the option of the assessee. The eligible start-up is required to be incorporated on or after the 1st day of April 2016 but before the 1st day of April 2022 (This was up to the 1st day of April 2021, extended to 2022 by Finance Act 2021). These 3 consecutive years for which 100% tax exemption is allowed can be chosen by the start-up at its discretion from any of the first 10 years. (Amendment introduced vide Finance Act 2020).

This deduction would be available to the eligible start-up if the total turnover of its business does not exceed Rs. 100 Crores in any of the years beginning from the year of its incorporation.

All eligible start-ups who intent to claim the benefits of such tax incentives would be required to:-

1. Maintain Separate Books of Accounts for Eligible Business
2. Get their Accounts audited by a Chartered Accountant
3. Furnish Audit Report in Form 10CCB along with ITR

Meaning of eligible Start-ups

The benefits of 100% Tax Deduction are not allowed to all start-ups but are only allowed to eligible start-ups. Only the start-ups which satisfy all the following mentioned criteria are considered as an eligible start-up.

1. Incorporated as a Company or LLP
2. Incorporated between 1st April 2016 and 1st April 2022 (Increased from 2021 to 2022 in Finance Act 2021)
3. The Total turnover of the business does not exceed Rs. 100 Crores
4. Certified by the Inter-Ministerial Board of Certification in respect of Eligible Business i.e. it is a business that involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
5. Should not be formed by splitting up or reconstruction of a business already in existence.

The scope and purpose of this write-up is to give a broad view as to how income tax gets charged to entrepreneurs. We have not discussed various tax rates, the computation methods, filing, assessments and related procedures. Entrepreneurs need to keep updated on the changes and amendments in various tax laws and rules or will end up in unenviable positions by way of penalties, punishments and legal actions. They should also keep ears and eyes open to know about various reliefs, rebates, exemptions given out to businesses particularly startups through Central and State Finance Bills (Budgets), government notifications, amendments etc. so that they won’t miss out on them.

The post How are Entrepreneurs Charged Income Tax? appeared first on Dutch Uncles.

Can an IRS Officer be a Businessman at the Same Time?

Aakash Sharma — Mon, 19 Apr 2021 06:35:08 +0000

Many people wonder what life is like in civil services. While millions of people dream of entering various Indian civil services like IAS, IPS, IRS and others, some are not happy with life in the system when they get to it. Because of this dissatisfaction, they often turn to the life of business, start-ups and companies.

Let’s see what motivates and allows an Indian Revenue Service (IRS) officer to enter the business world. And can they do it without any difficulties?

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Private companies and corporate start-ups open to having IRS officers on-board have great packages for those with experience in government.

Can an IRS officer be a businessman?

The Indian Revenue Services, often abbreviated to IRS, is a Group A federal government service under the Government of India. Government regulations prohibit IRS officials from personally engaging in direct business acts while serving as bureaucrats.

However, retired IRS employees are allowed to do business. The Code of Conduct prohibits IRS officers from doing any other full-time work while on active duty. There should be no dispute of interest, even for part-time appointments that an officer might have. Besides, any side-vocation of an IRS officer should be non-remunerative.

Why might an IRS officer quit her or his job as a government employee?

The prospect of earning more by vocations like business start-ups, consulting for multinational corporations or the Indian divisions of global accounting firms is attractive. India being a developing economy, the business opportunities and the wealth associated in the country are a large growing behemoth. And everyone wants a part of it.

Talented and experienced people such as IRS officers have great market value in multinationals and start-ups with substantial growth prospects. Consulting roles in these areas generate a much higher income for IRS officers than their public work with the government.

The power and positioning that comes with government posts might be absent in private employment, but higher wages adequately compensate for this. Private companies find government employees’ skills and experience unmatched, as no professional in any other segment is exposed to the experience a government employee faces.

Conditions under which IRS officers can run their business

There are certain conditions under which an incumbent IRS officer can do business, key of which are:

Retired IRS officers can participate directly in any gainful activity.

Active IRS officers can resign to run their business.

IRS officers can use their legal money to make legal investments and buy stock.

Alternative Business Routes

IRS employees can also ask family and friends to work as mentors and start a business for them while sharing their ideas. However, the government should be aware of this effort. IRS officers can engage in certain activities and occupations as long as they are paid only for charitable purposes.

A plurality of rules prohibiting IRS employees from doing personal business is meant to avoid the possibility of a conflict of interest, as IRS employees are primarily designated with the development and implementation of government policies.

The post Can an IRS Officer be a Businessman at the Same Time? appeared first on Dutch Uncles.

Do Internet Businesses Pay Taxes?

Aakash Sharma — Mon, 19 Apr 2021 00:35:05 +0000

If you want to sell handmade products online, or if you are a brick-and-mortar seller and want to add digital channels, there are some things you need to know regarding taxation and tax responsibilities before taking the digital step.

A simple answer to the question of whether or not internet businesses pay taxes is – yes. In India, internet-based companies and all types of online companies are required to pay taxes. Every business owner must understand the various taxes applicable to online sales and ensure that they have practical knowledge of the tax system.

Let’s take a denser look at the taxes applicable to internet-based businesses.

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If you already have an offline enterprise, you will be familiar with the tax system. However, if you are new to the online model of business, you must get the necessary help of tax specialists and consultants.

Direct Taxation through Income tax

Under the Income Tax Act 1961 and subsequent amendments to it, companies run via the internet, regardless of the marketplace, are obligated to pay income tax as per the nature of business.

Income tax is levied usually up to 30% of the profits of a company. Companies doing entirely online business in India may have to pay up to 25% of their earnings. International companies with a permanent holding in India also have to pay ~40% of their income in taxes.

Goods and Services Tax (GST)

Any dealers/traders selling goods or services online get the payment from customers after deduction of 1% tax. All the traders/dealers selling goods or services need to get registered under GST even if their turnover is less than Rs 20 lakh for claiming the tax deducted by aggregators like Amazon, Flipkart and others.

Indirect Taxation

Service Tax – If your internet business uses a host aggregator or a marketplace such as an e-commerce platform, you have to pay the service tax to the online platform.

Sales Tax – The sales tax payable amount varies across India from state to state. If you’re selling goods directly through your store, either online or offline, you’ll have to pay Value Added Tax (VAT) on same state delivery or Central Sales Tax (CST) when shipping out of state.

Custom Duty – This tax is levied only if you sell a product outside India’s legal boundaries. It depends on many variables, like the country in which you are offering the product, the product/ merchandise you are selling, its weight, etc.

Excise Duty – This applies to both online retailers and traditional stores. Consumer goods are subject to special taxes, which vary depending on the goods. Whether you sell offline or online, excise duty has to be paid by businesses.

Tax rules for state-wise online businesses

While the central government defines the federal tax structure, state governments also pass their own tax laws. The current regulations require internet companies to pay sales tax when selling products to consumers in their native states. This simply extends the general federal tax law for individual businesses, including internet marketers and other online companies.

The post Do Internet Businesses Pay Taxes? appeared first on Dutch Uncles.

What Are my Tax Duties as a Non-Resident LLC Owner?

Anju Nambiar — Sun, 18 Apr 2021 06:35:04 +0000

If you are a foreign owner of an LLC in India and you are residing out of India, your business is mostly delegated to a business manager.

In India, an LLC is also known as a Limited Liability Partnership (LLP). Opening an LLP in India is very attractive for a foreign investor, especially an NRI.

An LLP company in India must be registered for Income Tax, although there is a distinction between the company and its owner. The LLP owes 30% income tax to the government. There are also additional surcharges and alternate taxes to be paid. The company is also required to go through certain audits.

Corporate Tax (CIT) is a tax to be paid to the Government by companies, be it domestic or foreign. Irrespective of the nature of the business, if income is being generated within India, Corporate Tax must be paid. It doesn’t matter if the company is registered, controlled, or managed outside India.

The key point to note here is that the corporate tax is applicable only for the income accrued within India.

As an LLC owner, if you are not residing in your home country, there are two scenarios to consider. If the LLC is in the US, you have to pay US taxes. So, the key issue here is double taxation.

In the case of an LLC present in the US but the owners are NRIs, the income is taxed in India, but the company is treated as a foreign company. If the company has setup base within India, then you are eligible to avail certain deductions. But US taxes still apply.

The bottom line is that every LLP or LLC operating within the country has to file income tax returns every year. Active partners of the LLP or LLC must sign for IT returns.

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The bottom line is that every LLP or LLC operating within the country has to file income tax returns every year.

GST and the Non-Resident Taxable Person

Under the GST Act, an LLP incorporated in a foreign country with turnover exceeding 20-40 lakhs in a financial year must be registered for GST.

A ‘non-resident taxable person’ is defined under GST as someone who exchanges goods and services within a place in India, where GST is applicable even though his business is not established in India and he doesn’t reside within the country. Every non resident taxable person must apply for GST registration.

Such a person occasionally does transactions within India but doesn’t have a base setup here. He must be compliant with GST.

If you are such a start-up owner, you must delegate a person within India who will represent your company for GST compliance.

During registration, you will need to furnish appropriate documents about the business including physical presence of the business, identity proof documents, and bank account proofs. The person representing you within the country must possess authorisation documents.

You also have to make a deposit for GST and must keep checking the validity period of your GST registration. There are a lot of guidelines to be followed and your registration must be completed.

The non-resident taxable person comes under Section 24 of the GST law. He/She must make an advanced deposit of the GST tax amounting to the equivalent of the estimated tax liability for the registration duration.

The agent representing your LLC within India must furnish their own PAN number to pay the advance tax for your LLC.

What’s in it for me?

As we are well aware, Indian businessmen evade tax within India by living outside India. The gulf countries are especially popular destinations to do this. Gulf countries like the UAE have no tax laws.

An interesting development which recently occurred is ‘liable to tax’ which just came with the recent union budget and the finance bill. Liable to tax is a term within the Indian tax laws. With the recent finance bill, Nirmala Seetharaman redefined the meaning of the term. As per the redefinition, if an NRI owns a company in India from the UAE, whatever he is earning is taxable in India. India has an agreement with the UAE regarding double tax avoidance. With the redefinition of this term, NRIs living in the UAE will no longer be able to avoid taxation on their earnings back in India.

If you are a foreign owner of an LLC, your tax duties are mainly GST registration, compliance, and Corporate Taxes. Ensure that you complete your tax duties and that you stay within the purview of ‘liable to tax’ to enjoy smooth business operations within India.

The post What Are my Tax Duties as a Non-Resident LLC Owner? appeared first on Dutch Uncles.

What Taxes Does an Entrepreneur Have to Pay?

Aakash Sharma — Wed, 14 Apr 2021 12:30:10 +0000

Whenever the topic of taxation in entrepreneurship comes to light, some basic questions accompany the discussion. Why should an entrepreneur pay taxes? What are all tax obligations for a new business or start-up there? Do internet businesses pay taxes?

Well, this article will answer all such questions and more.

As per the law, all companies and individuals operating in India must pay taxes. These tax practices differ in formats, ways and directions. All businesses, including online stores or businesses with an online presence, must pay income tax as required by an India-based company under the Income Tax Act of 1961. There are two varieties of taxes – direct and indirect taxes. The difference comes from the way these taxes are applied. Some of them are paid by an entrepreneur directly, while others are taxed indirectly.

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The goal of offering start-ups and future entrepreneurs benefits to grow their businesses is imperative in recent taxation policies.

Direct Taxes

Capital Gains Tax: This tax has to be paid whenever an entrepreneur earns a large amount, e.g. by returns on an investment or sale of an asset.

Corporate Tax: Corporate income tax is paid by businesses and entrepreneurs on their revenue generated. This tax is accompanied by a slab of its own that determines how much tax the business has to pay.

Indirect Taxes

Sales Tax: Sales tax applies to sales of products manufactured or imported into India and may include services.

Services Tax: Just as sales tax is added to the price of products sold in India, services tax is also added to services provided and rendered within the country’s financial boundaries.

Goods and Services Tax (GST): The GST is a destination-based tax, as it applies to the place where consumption occurs. It applies to goods and services that add value at each stage of consumption in the supply chain.

Value Added Tax (VAT): The VAT, or commercial tax, does not apply to products with zero face value (such as essential foods and medicines) or exported products. The tax is used directly by manufacturers, retailers, and distributors to end-users at all supply chain stages.

Tax incentives for Indian Entrepreneurs

Three-year tax exemption

To promote business, the government has announced that it will grant 100% tax-exempt concessions to companies that market new products and services through innovation, growth, development or technological development in the first three years of operation.

20% exemption on Capital Gains

Capital gains are the taxes charged on profits gained from the sale of capital assets such as stocks and bonds. The government has recently made a provision for an exemption of 20% capital gains tax.

How India’s Latest Tax Policies Affect Entrepreneurship?

Recently, fiscal and tax policies for start-ups and budding entrepreneurs have been influenced by the Modi government’s flagship Startup India campaign. The goal of offering start-ups and future entrepreneurs benefits to grow their businesses is imperative in most policies. These policies are made to give a much-needed boost to nascent entrepreneurial ventures.

To complement the aim of Make in India and create more jobs within the country, the current tax ecosystem is favourable for new entrepreneurial ventures, except for GST and its increasingly complicated guidelines.

The post What Taxes Does an Entrepreneur Have to Pay? appeared first on Dutch Uncles.