TLDR: Are you running a partnership firm or thinking of starting one? While partnership firms in India offer flexibility and advantages, tax compliance can often be overwhelming. Navigating the maze of tax laws, tax returns, and other legal obligations may seem complex. But don’t worry—we’ve got you covered. In this comprehensive guide, we will walk you through everything you need to know about tax compliance for partnership firms in India, ensuring that your business stays on the right side of the law and avoids unnecessary penalties.

 

Introduction to Partnership Firms in India

Partnership firms have long been a cornerstone of India's business landscape, especially for small and medium-sized enterprises (SMEs). With a relatively easy formation process and shared responsibilities, partnership firms provide a more flexible business structure compared to other entities like private limited companies or limited liability partnerships (LLPs).

However, while partnership firms offer several advantages, their tax compliance requirements are complex and vary depending on the size and scope of the business. The tax laws governing these firms are framed under the Indian Partnership Act, 1932, and the Income Tax Act, 1961, among others. Failure to meet these compliance requirements can lead to penalties, legal issues, or even business shutdowns.

In this article, we’ll discuss the various tax and legal obligations that partnership firms in India need to adhere to, including income tax, Goods and Services Tax (GST), TDS (Tax Deducted at Source), and more.

 

Legal Framework Governing Partnership Firms in India

Before diving into tax compliance, it’s important to understand the legal framework that governs partnership firms in India.

A partnership firm is governed by the Indian Partnership Act, 1932, which lays down the legal guidelines for the formation, operation, and dissolution of partnership firms. According to Section 4 of the Act, a partnership is defined as a relationship between two or more individuals who agree to share the profits of a business carried on by all or any one of them acting for all. In essence, a partnership firm is a business entity where the partners share responsibilities, profits, and liabilities.

Key provisions of the Indian Partnership Act include:

  • Section 6: Covers the formation of a partnership and outlines the mutual rights and duties of partners.

  • Section 25: Deals with the dissolution of the partnership firm, which may occur due to mutual agreement, the expiry of a specified term, or specific events like the death of a partner.

While the Partnership Act governs the functioning of the firm, tax compliance for partnership firms is primarily governed by the Income Tax Act, 1961.

 

Income Tax Compliance for Partnership Firms

The Income Tax Act, 1961, governs the taxation of all business entities, including partnership firms. Partnership firms, including LLPs (Limited Liability Partnerships), are considered separate taxable entities under the Act. They are required to comply with income tax regulations, which include filing returns, calculating taxable income, and paying the applicable taxes.

Tax Treatment of Partnership Firms

  • Taxable Entity: A partnership firm is considered a separate taxable entity. Therefore, the partnership firm itself is liable to pay taxes on its income under the head “Profit and Gains of Business or Profession” as per Section 28 of the Income Tax Act.

Tax Rates for Partnership Firms

  • Regular Partnership Firms: The income of a regular partnership firm is taxed at a flat rate of 30%. However, this rate is subject to applicable surcharges and cess.

  • Limited Liability Partnerships (LLPs): LLPs, which are commonly used in India, are taxed similarly at 30%. However, the advantage of an LLP is that the partners enjoy limited liability, which is not the case in a traditional partnership firm.

  • Surcharge and Cess: If a partnership firm’s income exceeds ₹1 crore, a surcharge is applicable. The surcharge rates are:

    • 12% for income exceeding ₹1 crore but less than ₹10 crore.

    • 15% for income exceeding ₹10 crore.

  • Additionally, a Health and Education Cess of 4% is applicable on the total income tax payable.

Deductions Available to Partnership Firms

Several deductions are available under the Income Tax Act that can help reduce the taxable income of partnership firms:

  • Salary and Remuneration to Partners: Under Section 40(b), a partnership firm can pay remuneration to its working partners. The remuneration is subject to certain limits, with the maximum allowable amount being:

    • 90% of book profits for a single-partner firm.

    • A fixed percentage of profits for multiple-partner firms.

  • Business Expenses: Common business expenses such as rent, office supplies, utilities, travel expenses, depreciation, and more can be claimed as tax-deductible expenses.

  • Interest on Partner's Capital: A partnership firm can pay interest on the capital contributed by the partners, subject to prescribed limits, and this interest is deductible from the firm’s income.

 

Filing Tax Returns: Requirements and Procedures

Filing tax returns is an essential part of the tax compliance process for partnership firms. Let’s break down the key steps involved:

1. Filing Income Tax Returns (ITR-5)

The ITR-5 Form is used for filing income tax returns for partnership firms and LLPs. The return must be filed electronically with the Income Tax Department.

The due date for filing is generally July 31st of the assessment year (the same as for individuals). However, if the firm is subject to a tax audit, the due date is extended to September 30th.

2. Tax Audit for Partnership Firms

If the turnover of a partnership firm exceeds ₹1 crore in a financial year, it must undergo a tax audit under Section 44AB of the Income Tax Act. A qualified Chartered Accountant (CA) must perform the audit and issue a report in Form 3CA or 3CB.

3. Penalty for Non-Compliance

Failure to file tax returns on time or to undergo a tax audit (when applicable) can lead to penalties. These penalties range from ₹1,000 to ₹1,50,000, depending on the nature of the default.

 

Goods and Services Tax (GST) Compliance

In addition to income tax, partnership firms may also be required to comply with Goods and Services Tax (GST) if they are engaged in the supply of goods or services.

GST Registration

Partnership firms must register for GST if their aggregate turnover exceeds ₹20 lakh (₹10 lakh for special category states). Registration is mandatory under the Goods and Services Tax Act, 2017.

Filing GST Returns

GST-registered firms must file the following returns regularly:

  • GSTR-1: For outward supply (sales).

  • GSTR-3B: For a summary of outward and inward supply, along with tax payments.

  • GSTR-9: For annual returns.

GST Rates

GST rates vary based on the category of goods or services provided by the firm. These rates range from 0% to 28%.

Penalties for GST Non-Compliance

Failure to file GST returns or make timely payments can attract significant penalties, including:

  • ₹50 per day for late filing.

  • 100% of the tax due in case of willful evasion.

 

Other Tax Considerations for Partnership Firms

Apart from income tax and GST, there are other tax compliance aspects that partnership firms must consider:

Transfer Pricing

Partnership firms involved in international transactions or transactions with related parties must comply with transfer pricing regulations under Section 92 of the Income Tax Act, 1961. These regulations ensure that transactions between related parties are conducted at arm's length, i.e., on terms that would be acceptable in the open market.

Tax Deducted at Source (TDS) Compliance

Partnership firms must deduct tax at source (TDS) on certain payments like salaries, rent, professional fees, and interest. The firm must file quarterly TDS returns using Form 24Q (for salaries) or Form 26Q (for other payments).

Tax on Capital Gains

If a partnership firm sells assets like property or shares, it may be subject to capital gains tax. The tax rate depends on whether the asset is short-term or long-term, and whether it is listed or unlisted.

 

Why Choose Corpzo?

Navigating the complexities of tax compliance can be daunting, especially for partnership firms that want to focus on growing their business. This is where Corpzo comes into the picture. As a leading legal compliance service provider, Corpzo offers a range of services to help partnership firms manage their tax obligations efficiently and effectively. Whether you need assistance with income tax filings, GST registration, or transfer pricing, Corpzo has the expertise to guide you through the process.

Why choose Corpzo?

  • Expert Guidance: Our team of experienced tax professionals and Chartered Accountants provides expert guidance tailored to your firm’s specific needs.

  • Seamless Compliance: We ensure your partnership firm complies with all tax regulations, from income tax to GST, avoiding any potential penalties.

  • Time-Saving: With Corpzo handling your tax compliance, you can focus on growing your business without worrying about legal complexities.

  • Affordable Solutions: We offer affordable, customizable packages designed to meet the needs of small and medium-sized businesses.

Call +91 9999 139 391 or WhatsApp for a free consultation and let Corpzo help you navigate the world of tax compliance.

 

Conclusion

Tax compliance is a crucial aspect of running a partnership firm in India. Understanding the various tax obligations, including income tax, GST, TDS, and capital gains tax, is essential to ensure that your business remains compliant with Indian laws. Failure to comply with these regulations can result in penalties, legal issues, and even business closure.

By staying informed and seeking professional assistance when necessary, you can navigate the complexities of tax compliance and keep your partnership firm on the right track. And if you need expert assistance with managing tax compliance, Corpzo is here to help.