by There are different forms of ventures that entrepreneurs can choose to start their businesses, such as sole proprietorship, partnership, limited liability partnership (LLP), private limited company, and public limited company. Each of these forms of ventures has different tax implications that entrepreneurs need to consider before making a decision.
Sole Proprietorship:
The business is owned and operated by a single individual. From a tax perspective, the profits earned by the business are treated as the individual’s personal income, and are taxed at the applicable personal income tax rate. Additionally, the individual is also required to pay a self-assessment tax on the profits earned by the business.
Tax implications of a sole proprietorship in India:
Income Tax: As mentioned above, the profits earned by the sole proprietorship are treated as the individual’s personal income and are taxed at the applicable personal income tax rate. The tax rate varies depending on the income slab the individual falls under. Currently, the income tax slabs in India are as follows:
Up to Rs. 2.5 lakh: Nil
Rs. 2.5 lakh – Rs. 5 lakh: 5%
Rs. 5 lakh – Rs. 7.5 lakh: 10%
Rs. 7.5 lakh – Rs. 10 lakh: 15%
Rs. 10 lakh – Rs. 12.5 lakh: 20%
Rs. 12.5 lakh – Rs. 15 lakh: 25%
Above Rs. 15 lakh: 30%
- Self-Assessment Tax: In addition to the income tax, the individual is also required to pay a self-assessment tax on the profits earned by the business. The self-assessment tax is calculated at the rate of 18% of the tax liability, and is required to be paid before filing the income tax return.
- Goods and Services Tax (GST): If the sole proprietorship is engaged in the sale of goods or services, it may be required to register for GST. GST is a value-added tax that is levied on the sale of goods and services in India. The current GST rate for most goods and services is 18%.
- Tax Deductions: The individual can claim tax deductions on expenses incurred for the sole proprietorship business. For example, if the individual uses a portion of their home as an office, they can claim a deduction for the expenses incurred on rent, electricity, etc. Additionally, the individual can claim a deduction for any expenses incurred on goods or services purchased for the business.
Partnership:
In a partnership, two or more individuals come together to start a business. The profits earned by the partnership are divided among the partners according to their share in the business, and are taxed at the applicable personal income tax rate. Additionally, the partnership is required to file an income tax return and pay taxes on the profits earned by the business.
From a tax perspective, a partnership is treated as a separate entity for tax purposes, and is taxed separately from the partners. Here are the key tax implications of a partnership in India:
- Income Tax: The partnership is required to file an income tax return each year, and pay tax on the profits earned during the year. The tax rate for partnerships is 30% of the taxable income. However, partnerships with an annual turnover of less than Rs. 400 lakhs (for the financial year 2021-22) can opt for a lower tax rate of 25%.
- Partner’s Share of Profit: Each partner’s share of profit from the partnership is taxed as personal income, and is subject to personal income tax rates. The tax rates for personal income tax are the same as those for sole proprietorships, as mentioned in the previous answer.
- Self-Assessment Tax: Partners are also required to pay self-assessment tax on their share of profits, along with interest if the tax is not paid on time. The self-assessment tax is calculated at the rate of 18% of the tax liability, and is required to be paid before filing the income tax return.
- Goods and Services Tax (GST): If the partnership is engaged in the sale of goods or services, it may be required to register for GST. The current GST rate for most goods and services is 18%.
- Tax Deductions: Partners can claim tax deductions on expenses incurred for the partnership business. For example, partners can claim a deduction for any expenses incurred on goods or services purchased for the business.
Limited Liability Partnership (LLP)
An LLP is a hybrid form of partnership and company, where the liability of the partners is limited to the extent of their contribution to the business. From a tax perspective, an LLP is treated as a partnership, and the profits earned by the LLP are divided among the partners and taxed at the applicable personal income tax rate.
From a tax perspective, an LLP is treated as a separate entity for tax purposes, and is taxed separately from the partners. Here are the key tax implications of an LLP in India:
- Income Tax: The LLP is required to file an income tax return each year, and pay tax on the profits earned during the year. The tax rate for LLPs is 30% of the taxable income. However, LLPs with an annual turnover of less than Rs. 400 lakhs (for the financial year 2021-22) can opt for a lower tax rate of 25%.
- Partner’s Share of Profit: Each partner’s share of profit from the LLP is taxed as personal income, and is subject to personal income tax rates. The tax rates for personal income tax are the same as those for sole proprietorships and partnerships, as mentioned in the previous answers.
- Self-Assessment Tax: Partners are also required to pay self-assessment tax on their share of profits, along with interest if the tax is not paid on time. The self-assessment tax is calculated at the rate of 18% of the tax liability, and is required to be paid before filing the income tax return.
- Goods and Services Tax (GST): If the LLP is engaged in the sale of goods or services, it may be required to register for GST. The current GST rate for most goods and services is 18%.
- Tax Deductions: Partners can claim tax deductions on expenses incurred for the LLP business. For example, partners can claim a deduction for any expenses incurred on goods or services purchased for the business.
Private Limited Company
A private limited company is a separate legal entity from its owners, and the liability of the owners is limited to the amount of capital they have invested in the business. From a tax perspective, a private limited company is subject to corporate income tax, which is currently 25%. Additionally, the company is required to file an income tax return and pay taxes on the profits earned by the business.
Tax implications of a Private Limited Company in India:
- Corporate Tax: The Private Limited Company is required to file an income tax return each year, and pay tax on the profits earned during the year. The tax rate for Private Limited Companies is 30% of the taxable income. However, Private Limited Companies with an annual turnover of less than Rs. 400 lakhs (for the financial year 2021-22) can opt for a lower tax rate of 25%.
- Dividend Distribution Tax: If the Private Limited Company distributes profits to its shareholders in the form of dividends, it is required to pay dividend distribution tax at the rate of 15% (plus surcharge and cess) on the amount of dividend distributed.
- Capital Gains Tax: If the Private Limited Company sells any capital assets (such as property, shares, or securities), any gains realized on the sale are subject to capital gains tax. The tax rate for long-term capital gains (assets held for more than 24 months) is 20%, while short-term capital gains (assets held for less than 24 months) are taxed at the applicable income tax rate.
- Minimum Alternate Tax: If the Private Limited Company has a book profit but has paid no income tax or has paid income tax at a rate lower than the prescribed minimum alternate tax rate, it is required to pay a minimum alternate tax at the rate of 18.5% of book profit.
- Goods and Services Tax (GST): If the Private Limited Company is engaged in the sale of goods or services, it is required to register for GST. The current GST rate for most goods and services is 18%.
- Tax Deductions: Private Limited Companies can claim tax deductions on expenses incurred for the business. For example, they can claim a deduction for any expenses incurred on goods or services purchased for the business.
Public Limited Company
A public limited company is also a separate legal entity from its owners, and the liability of the owners is limited to the amount of capital they have invested in the business. From a tax perspective, a public limited company is subject to corporate income tax, which is currently 25%. Additionally, the company is required to file an income tax return and pay taxes on the profits earned by the business.
Tax implications of a Public Limited Company in India:
- Corporate Tax: Like a Private Limited Company, a Public Limited Company is treated as a separate entity for tax purposes, and is taxed separately from the shareholders. The tax rate for Public Limited Companies is 30% of the taxable income. However, Public Limited Companies with an annual turnover of less than Rs. 400 lakhs (for the financial year 2021-22) can opt for a lower tax rate of 25%.
- Dividend Distribution Tax: If the Public Limited Company distributes profits to its shareholders in the form of dividends, it is required to pay dividend distribution tax at the rate of 15% (plus surcharge and cess) on the amount of dividend distributed.
- Capital Gains Tax: If the Public Limited Company sells any capital assets (such as property, shares, or securities), any gains realized on the sale are subject to capital gains tax. The tax rate for long-term capital gains (assets held for more than 24 months) is 20%, while short-term capital gains (assets held for less than 24 months) are taxed at the applicable income tax rate.
- Minimum Alternate Tax: If the Public Limited Company has a book profit but has paid no income tax or has paid income tax at a rate lower than the prescribed minimum alternate tax rate, it is required to pay a minimum alternate tax at the rate of 18.5% of book profit.
- Goods and Services Tax (GST): If the Public Limited Company is engaged in the sale of goods or services, it is required to register for GST. The current GST rate for most goods and services is 18%.
- Tax Deductions: Public Limited Companies can claim tax deductions on expenses incurred for the business. For example, they can claim a deduction for any expenses incurred on goods or services purchased for the business.
Source:
Central Board of Direct Taxes (CBDT): https://www.incometaxindia.gov.in/Pages/default.aspx
Goods and Services Tax (GST) Council: https://www.gstcouncil.gov.in/
Ministry of Corporate Affairs: https://www.mca.gov.in/
