When starting a new project, One of the most commonly asked questions is what legal entity should be set up?  Based on the type and scale of the company, some of the alternatives options to the legal entity are:

a. Sole Proprietorship

b. Limited Liability Partnership

c. Private company

d. Public Company

e. Joint Ventures

As such, there really is no legal principle that a ‘business’ should be set up to start a corporation. The incorporation of an organization does have its own pros and cons. The creation of a corporation enhances the function of enforcement. When the company is increasing quickly and becoming impossible to manage, it helps to split this into a separate entity that would have its very own PAN and submit a separate tax return. Alternatively, you can opt to carry on your company as a single owner.

Maintaining Accounting Books

If any of the below conditions are satisfied as a business, the management of the books of accounts in compliance with the income tax act is compulsory:

a. Revenue is much more than Rs. 1,20,000.

b. Net revenue, turnover or gross receipts are greater than Rs. 10.000.000.

In any of the 3 years directly previous the following year. This provision was further eased for persons and the HUF, where they’d be required by the requirement to keep books of records unless they did.

a. Income is much more than or equivalent to Rs 2.5 lakhs.

b. Net revenue, turnover or gross receipts are higher than Rs 25 lakhs in each of the 3 preceding years.

Tax Audit

Presumptive Taxation for Business

Businesses with gross receipts of greater than Rs 1 crore in the financial year shall be subject for tax audits. The due date of submission of the tax audit report shall be 30 September of the AY. The tax audit report must be submitted digitally via Form 3CD. The deadline for submitting the income tax returns for taxpayers liable for a tax audit is also 30 September of the tax year.

The updating of the tax audit report is not feasible under ordinary conditions. Nevertheless, it is necessary to amend the tax audit report in situations where accounts have been updated.

Due Date

  • Date of submitting the tax audit report – 30 September of the appraisal year
  • Deadline for the filing of the return (if possible) – 30 September of the tax year
  • Deadline for the filing of the return (if tax is not needed) – 31 July of the tax year

Presumptive Taxation

Presumptive tax for business is defined in section 44AD of the income tax act. Any company with a turnover of less than Rs 2 crore may choose to be taxed presumptively. They are expected to show earnings of 8% for non-digital transactions or 6% for digital transactions, whatever is relevant. 

The following companies are exempt from the assumption of taxation: 

a. Life insurance agents.

b. All sorts of commission.

c. Doing the business of plying, recruiting or leasing goods carriages.

Read Which ITR to file?

Computation of Presumptive Taxation

Let’s understand this with an example-

Mukesh general store has gross receipts for FY 2019-20 of ₹1.8 Crore and do not hold or maintains any account books. The Mukesh general store has chosen for presumptive taxes. By cash payments, they received ₹80 lakhs and via the digital medium, they received ₹90 Lakhs during the year.

What’s going to be the income underneath the heading of business and the profession?

Income under the business and profession:

For non-digital transactions : 80,00,000 * 8% = Rs. 6,40,000

For digital transactions : 90,00,000 * 6% = Rs. 5,40,000

Income under the head “Business or Profession” will be = Rs 11,80,000

Benefits of Presumptive Taxation

  • The National Defense Fund has been formed by the Central Government.
  • Prime Minister’s National Relief Fund.
  • Under the assumption of taxes under Section 44AD, your net income is assumed to be 8% of your turnover and you’ll be charged on that income.
  • If your earnings are in a virtual (non-cash) form, just 6% of your receipts would be your net income and you’ll be taxed on that money.
  • You wouldn’t have to keep your financial records.
  • You wouldn’t have to check your financial reports.
  • You have to pay advance tax – so regardless of calculating taxes and collecting tax on a quarterly basis, you will pay all the advance tax before March 31. Advance tax, for taxpayers who have applied for an assumption plan, is due by 15 March of the applicable financial year if you intend your income tax liabilities to reach Rs.10,000 in the fiscal year.

International Transaction

TDS deducted by the foreign client

If you work with clients outside India, payments can be obtained by you through PayPal or as a direct credit to your bank account. Usually, the international customer will subtract taxes before billing you in compliance with local tax laws. You, as a citizen of India, will also be taxed on all your wages. That being said, in exchange for wages, you will take compensation for taxes paid abroad.

TDS not deducted by the foreign client

If no TDS has been calculated, there is little to think about. You ought to add these receipts in your gross income when you measure your income and pay the relevant tax on it because you are an India citizen. In order to satisfy the advance tax criteria, you will need to measure your taxable taxes from all sources.

Return of Income

A person of HUF engaged in business will be required to report his or her report of income in the form of ITR 3 For a taxpayer who chooses for a presumptive fee, he or she is to file his or her return in ITR 3