In this blog post, Prerana Sridhar, a final year law student from School of Law, Christ University (Bangalore), and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the annual tax compliances that need to be initiated by a partnership firm.
Partnership is an agreement between two or more people who have agreed to share the profits of a business carried on by all of them together or any of them acting for them all. People who have entered into partnerships are separately called “partners” and collectively “a firm.”[1] Partners are obligated to carry on the work of the firm to the greatest advantage, to be just and to produce true accounts and complete information of all things affecting the firm to all other partners.
The definition of partnership contains three elements –
- There must be an agreement entered into by all persons concerned;
- The agreement must be to share the profits of business;
- The business must be carried on by all or any of the persons concerned, acting for all.[2]
Compliance means conforming to a rule, policy, standard or law. Compliances are required as it obligates people to work in line with the law. Compliances ensure that the incorporation and business of a firm are in conformity with the law.
Common Compliances
The common compliances required under the Act:
- Registration of firm in Form I with a time limit of 1 year.
- Change in Firm Name or Principal Place or Nature of Business in Form II with a time limit of 90 days.
- Closing and Opening of Branches in Form III with a time limit of 90 days.
- Change in Name/Address of Partner in Form IV with a time limit of 90 days.
- Change in Constitution or Dissolution in Form V with a time limit of 90 days.
- When a minor becomes major and elects to become or not to become a partner in Form VI with a time limit of 90 days.[3]
A partnership firm is a popular form of business controlled by people acting for all and working under a personal liability. Partnership firms are relatively easy to start and are prominent amongst small and medium-sized establishments in the unorganized sector. With the introduction of Limited Liability Partnerships in 2008 in India, partnership firms are losing their importance due to the added advantages offered by a Limited Liability Partnership.
There are two types of partnership firms, registered and unregistered partnership firms. A firm needs to comply with Section 58 of the Partnership Act, 1932 to be fully registered. It is not compulsory to register the firm, but it is more advantageous to register a firm. Partnership firms are formed by drafting the Partnership Deed by the partners.[4]
Partnership firm must file their annual tax return with the Income Tax Department. Other tax compliances like VAT or service tax filing may be necessary based on the business performed and the nature of the firm. A partnership firm is not obligated to file its annual accounts with the Registrar each year, unlike a Limited Liability Partnership or Company. It is not obligatory for Partnerships to prepare audited financial statements each year. However, a tax audit may be necessary based on the turnover and other criteria.
Partnership firm is viewed as a separate entity for the purpose of taxation. It is not necessary for the partnership to be registered. So partnership firm is taxed under the income tax slab for firms and partners are taxed under the income tax slab for individuals.
Tax Compliance
Section 2(23) (i)[5] takes the meaning of the “firm” from. Section 4 of the Indian Partnership Act, 1932 which defines firm as “Persons who have entered into a partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name.”
Obtaining Permanent Account Number and Tax Deduction Account Number registration from the Income Tax Department for a Partnership Firm from the relevant Authorities once the Partnership Firm is registered is necessary.
Tax Rate
In the case of every firm, the rate of income tax on the whole of the total income will be 30% percent surcharge on income tax.
The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 of the Income Tax Act, 1961 shall, in the case of every firm, having a total income exceeding one crore
rupees, be increased by a surcharge for the purposes of the Union calculated at the rate of twelve per cent, of such income-tax, provided that in the case of firm mentioned above having total income exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.[6]
When it comes to the mode of paying the tax by a partnership firm, it can be stated that taxes can be paid in any of following modes:
- Physical Mode – Payment by furnishing the hard copy of the challan at the designated bank, i.e., Challan ITNS 280.
- e-Payment mode – Payment by using the electronic mode. Added to this, e-payment is mandatory for a firm who is liable to get its accounts audited[7].
Filing of Return of Income
It is mandatory for every partnership firm to file the return of income irrespective of the amount of revenue or loss.[8] A company can file its return of revenue in ITR 5. ITR 5 is for persons other than:
- Individual,
- HUF,
- Company and
- Person filing Form ITR-7.
It is mandatory for a firm to file a return of income electronically with or without digital signature. A partnership firm may also file a return of income under Electronic Verification Code. However, a firm liable to get its accounts audited under Section 44AB shall furnish the return electronically under digital signature.
Return Forms can be filed with the Income Tax Department in any of the following ways, –
- by furnishing the return in a paper form;
- by furnishing the return electronically under digital signature;
- by transmitting the data in the return electronically under electronic verification code;
- by transmitting the data in the return electronically and thereafter submitting the verification of the return in Return Form ITR-V.[9]
Particulars Regarding Due Dates for Filing Returns
A firm who is required to get its accounts audited under the Income Tax Act, 1961 or under any other law, the due date will be September 30 of the assessment year.
In any other case, it will be July 31 of the assessment year.
Conclusion
The advantages of Partnership Firms are that they are easy to start, have minimal compliance requirements, relatively inexpensive and annual filing is not required. But on the other hand, Partnership firms have unlimited liability and partners are personally liable for the acts of the firm. All the partners are jointly liable for the debt of the firm. They can share the liability among themselves, or anyone can be asked to pay all the debts even from his personal properties.
By observing the compliance requirements of partnership firms, it can be concluded that partnership firms do not have optimum compliance requirements. To enforce an efficient compliance with the law, more compliance can be imposed on such firms. These compliances can vary depending on the nature of the business. Compliances can be implemented in light of Wealth Tax, 1957, Excise Duties, Customs Act, 1962, Service Tax and Local taxes. Labor Laws such as Provident Fund Act, 1952, Employees State Insurance, 1948, Minimum Wages Act, 1948, and Factories Act, 1948 can be included for compliance purposes. Miscellaneous compliances can be included such as compliance under Shops & Establishments Act, IPR Protection procedures, and Pollution Control Laws. Added to this, Partnership firms can be obligated to maintain books of accounts and registers, etc.
Hence, it can be concluded by stating that Partnership firms do not have optimum annual compliances for efficient conformity with the law, and more compliance requirements can be imposed to make it a stricter, more efficient structure.
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References:
[1] P C MARKANDA, The Law of Partnership, Edition 2010, Page 9
[2] P C MARKANDA, The Law of Partnership, Edition 2010, Page 11
[3] Forms under the Indian Partnership Act, 1932
[4] P C MARKANDA, The Law of Partnership, Edition 2010, Chapter VII
[5] Income Tax Act, 1961
[6] Paragraph C of First Schedule of Finance Bill, 2016 (Passed on May 14, 2016) – As per Section 167A of Income Tax Act, 1961
[7] Section 44AB of the Income Tax Act, 1961
[8] Section 139 of Income Tax Act, 1961
[9] http://www.incometaxindia.gov.in/tutorials/5-filing%20of%20return%20of%20income.pdf
