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    How your business structure affects taxes

    Synopsis

    Relevant business structure attracts a certain tax liability and it is important to consider the tax implications before finalizing the formation.

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    Each structure attracts a certain tax liability and it is important to consider the tax implications before finalizing the formation.
    By Tanvi Loond

    Entrepreneurs identify the relevant business organization based on several factors such as ease of commencing operations, compliance requirements and the costs involved, agreement with other members and need to raise funds.

    Each structure attracts a certain tax liability and it is important to consider the tax implications before finalizing the formation. In this article, we list out business structures considered by SMEs and the taxes that follow.

    Limited Liability Partnership or Partnership Firm
    A firm is taxed as a separate legal entity. In computing the taxable income of a firm any salary, bonus, commission or remuneration which 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. However, the maximum rate at which interest is allowed to a partner is 12% per annum.

    Rate of tax
    The income of a firm is taxed at a flat rate of 30% plus surcharge plus cess

    Surcharge
    Income

    Surcharge

    Less than Rs 1 crore

    Nil

    More than Rs 1 crore

    12%


    Cess
    Health and education cess is computed as 4% on income tax and surcharge


    Alternate Minimum Tax
    Tax payable by firm cannot be less than 18.5% (plus surcharge and cess as applicable) of adjusted total income as defined in section 115JC


    Private Limited Company
    A company is a juristic 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. Section 2(68) of the Companies Act defines a private limited company as a company having a minimum paid up share capital and which by its articles

    - restricts the right to transfer its shares
    - limits the number of members to 200
    - prohibits any invitation to the public to subscribe for any securities of the company

    For the purpose of taxation, companies have been classified into two categories - Domestic company and Foreign company.


    Rate of tax
    Domestic company

    Tax rate

    Where turnover does not exceed Rs 250 crore

    25%

    Where turnover exceeds Rs 250 crore

    30%

    Foreign company


    Where royalty is received from Government of an Indian concern or fees is received for rendering technical services

    50%

    Where there is other income

    40%



    Surcharge
    Surcharge is applicable at the rates given below:


    Net income does not exceed Rs 1 crore

    Net income is in the range of Rs 1 crore- Rs 10 crore

    Net income exceeds Rs 10 crore

    Domestic company

    Nil

    7%

    12%

    Foreign company

    Nil

    2%

    5%



    Cess
    Health and education cess is computed as 4% on income tax and surcharge


    Minimum Alternate Tax
    Tax payable by firm cannot be less than 18.5% (plus surcharge and cess as applicable) of adjusted total income as defined in section 115JC


    One Person Company
    One Person Company is a relatively new concept which 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. Section 2(62) defines an OPC as a company which has only one person as a member. Like a Private Limited Company an OPC is a separate legal entity distinct from the member who constitutes it.


    Rate of tax
    For the purpose of 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.

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

    Rebate
    Resident individuals whose income does not exceed the notified limit (Rs 5,00,000 for Financial Year 2019-20) can avail rebate under section 87A. This rebate is deductible from income tax before calculating education cess. The amount of rebate is 100% of income tax or 12,500 p.a., whichever is less.

    Surcharge
    Surcharge is applicable at the rates given below:

    Income

    Surcharge

    Less than Rs 50 lakh

    Nil

    Rs 50 lakh – Rs 1 crore

    10%

    More than Rs 1 crore

    15%


    Cess
    Health and education cess is computed as 4% on income tax and surcharge

    Alternate Minimum Tax
    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


    Co-operative Society
    A co-operative society is registered under the Cooperative Societies Act, 1912 and constitutes a separate unit of assessment. The object of a co-operative society is the promotion of economic interests of its members in accordance with co-operative principles.

    Rate of tax
    Net income range

    Tax rate

    Up to Rs 10,000

    10%

    Rs. 10,000 – Rs. 20,000

    20%

    Above Rs. 20,000

    30%


    Surcharge
    Surcharge is applicable at the rates given below:

    Income

    Surcharge

    Less than Rs 1 crore

    Nil

    More than Rs 1 crore

    12%


    Cess
    Health and education cess is computed as 4% on income tax and surcharge

    Alternate Minimum Tax
    Tax payable by a co-operative society cannot be less than 18.5% (plus surcharge and cess as applicable) of adjusted total income as defined in section 115JC

    Local Authorities

    A local authority is defined as a person by the Income Tax Act, 1961 and is therefore a separate entity. Local authorities include municipal corporations, Panchayat, Port Trusts etc.

    Rate of tax
    A Local Authority is taxable at the rate of 30% plus surcharge plus cess

    Surcharge
    Surcharge is applicable at the rates given below:

    Income

    Surcharge

    Less than Rs 1 crore

    Nil

    More than Rs 1 crore

    12%


    Cess
    Health and education cess is computed as 4% on income tax and surcharge

    Alternate Minimum Tax
    Tax payable by a local authority cannot be less than 18.5% (plus surcharge and cess as applicable) of adjusted total income as defined in section 115JC.

    The writer is the Founder and CEO, Insta C.A. (www.InstaCA.in). Insta C.A. is an online tax and accounting service for SMEs and startups. For more information contact info@instaca.in or follow them at their twitter handle @InstaCA1
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    3 Comments on this Story

    Raju Kumar Chaurasiya412 days ago
    Thanks for this information
    Jai Prakash412 days ago
    isn''t the idea of wealth tax would be good
    Jai Prakash412 days ago
    Isn''t the idea of wealth tax would be great
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