In this article, Vedashree Kurukuri, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses tax provisions an entrepreneur must know about.
Tax provisions an entrepreneur must know about
Tax is a mandatory amount levied by the government on individuals. Article 265 of the Constitution of India states that ‘no tax shall be levied or collected except by authority of law’. The power to levy taxes has been divided between the Central Government and State Government as per the schedules of the constitution of India. Income tax is regulated by the Central Government while the State Government dealt with sales tax, service tax, VAT and the like. The GST regime which has been adopted in 2017 has now replaced various forms of indirect taxes. Tax evasion is an offence as per the provisions of law and any person if found to have evaded tax is liable to be punished.
Types of taxes
Direct tax is the tax levied on the income of the assessees. The tax must be paid directly by the assessee to the government. The tax is levied annually on the income of the assessee. Income tax is the most important form of direct tax which is regulated by The Income Tax Act, 1961. A certain percentage of the income of an individual is mandatorily payable as tax. The tax slabs are decided and notified through the budget every year. This act further divides Income into the following categories for the purpose of calculating taxes:
- Income from salaries
- Income from house property
- Income from profits and gains of profession or business
- Income from capital gains
- Income from other sources
The form of business chosen by the entrepreneur helps the person to decide under which of the above category would the income fall under in order to be taxed in consonance with the provisions of the Act.
Indirect taxes involve a third party i.e., the tax is levied on one party while it is collected from another. For example, the tax is levied by the government on the consumer of goods or services while it is collected from the consumer. Indirect taxes are collected as per transactions and not necessarily annually.
Goods and Services Tax
A business is carried either for sale of goods or rendering of services or both. These aspects of a business require the consideration of indirect taxes which currently is followed as the GST regime. GST provides for a single legislation for the regulation of taxes on goods and services. It has provided for the percentage to be charged as tax with respect to various categories of goods and services. IGST provided for the taxation rates and structure when there is exchange of such goods or services or both interstate.Under the GST regime, tax is to be paid by the taxable person who undertakes the supply of goods and/or services. It mandates that the taxable person must be carrying on a business of supplying goods and/or services must pay GST when the business crosses the threshold limit of Rs.20,00,000. This can be said to be an exemption i.e., only once a business crosses Rs.20,00,000, it is liable to pay tax. In order to pay tax under the GST regime, the taxpayer must be registered for the same. Upon registration a unique identification number i.e., GSTIN is allotted for further recognition. GST also provides for certain categories of goods and services which are exempted from being taxed under GST. Input tax credit may also be claimed by the taxpayer but in order to do the same it is necessary to be registered under the GST. The GST legislations have specifically stated the rules that compliance that is to be carried out by the taxable persons.
Types of Business and their effect on taxation
A sole proprietorship is a business solely run by the proprietor in his own capacity. The complete control of the business is in the hands of the owner which provides a high degree of flexibility in taking business decisions. The main disadvantage of this form of business is its unlimited liability which poses a risk to the personal assets of the owner of the business. A sole proprietorship is not a separate legal entity. Its existence is tied to that of its owner. It is required that a bank account is created on the name of the business to facilitate business transactions. A PAN card also must be obtained. With respect to taxation, the tax is to be paid by the proprietor and not the business as it is not a legal entity. The owner of the business is taxed based on the profits made from the business. It becomes the income earned by the sole proprietor along with any other incomes that the sole proprietor may earn.
A partnership firm is one where two or more persons come together with the object of conducting a business. A partnership is formed on the basis of a partnership deed which may or may not be registered as per the decision of the partners. A partnership firm is also not recognised as a legal entity. The partners may either take a salary from the firm or a share in the profits or both as per the terms of the partnership deed. The income so earned by the partner would either fall under the head salary or business or both as per the facts of the case for the purpose of taxation.
Limited liability partnership
A limited liability partnership is a form of business which has benefits of a partnership along with that of a company. While it is easier to incorporate, it taken a higher stand over a partnership as it has limited liability and a recognised legal status. But a limited liability partnership mandates that the firm is registered in order to be vested with the legal status. The relevant tax aspects include the tax levied on the salaries of the partners, if any, and the profits made by the firm separately.
A company is one which is recognised by the Companies Act to be a company. It could either be a private limited company, one person company or a public limited company. These types of companies are characterised by limited liability and perpetual succession. One of the most promising advantage of setting up a company is that a company is recognised as separate legal entity. This status enables the company to sue and be sued on its own name. its existence is separate from that of its shareholders and members. A company is also empowered to enter into contracts on its own name and every record is maintained under the name of the company. The transactions are carried on in the name of the company. All these factors are essential in identifying its tax liability. The company is liable to pay tax on the profits in the due course of the business. The calculation of such tax has to be done in a specified format after making the necessary payments. Any business that has employees must also consider the provisions of tax deducted at source (TDS). The Income tax Act provides for tax to be deducted by the employers in certain cases. This is an offence if not followed in a proper manner under the Income Tax Act, 1961 which also mandates that the tax which ought to have been deducted must be paid to the government irrespective of it actually being deducted from the salary of the employee.An entrepreneur must essentially focus on the provisions of the Income Tax Act which require the returns to be filled by all those individuals who fall within the category of an assessee.
An entrepreneur has various legal aspects that must be taken into account before the business is actually set up. It ranges from the steps that must be taken from much before the incorporation of the business to appointment of the necessary personnel for the management of the business to the yearly reports that must be submitted to the government. One of the most important aspects are that of taxation. Tax evasion is an offense punishable by law. The provisions that come into play are based on the form of the business set up by the entrepreneur. While one for of business has few regulations, another has more. This is due to the effect it has on its respective market and the consumers. Also another aspect that led to differentiation on the tax of different forms of business is due to the amount of money that goes into various transactions of the business. The more the money that is circulated, the more regulations are needed. In order to ensure that the business runs without any hassle, the entrepreneur must ensure compliance with the various regulations and aim to prevent any form of tax evasion.