How sole proprietorship businesses are taxed in India

Sole proprietorship are small and independent service providers or resellers who work for themselves in their own business. It’s a business owned by a single individual. Such business owners are either working in their own name or with a given name which is not registered in India.

Such business carry very low liability risk and therefore these owners are not required liability protection like in the case of private limited or public limited companies. How sole proprietorship business are taxed in India

Income tax calculation for sole proprietorship

Sole proprietorship is not taxed as a separate legal entity, but rather, the owners file their business taxes on their personal tax returns. They are taxed as an individual on their net taxable income, after related business expenses, IT deductions and other incomes if any have been taken into account.

From gross receipts, all business expenses are deducted to find out the business income. This income has been considered as “incomes under the head profits and gains of business or profession” and with this, other incomes like interest from bank, salary, house rent are get added to find out the gross total income. Sole proprietorship business is entitled to all IT deductions which are applicable to the individual assessee being the owner of such business. From the gross total income, IT deductions as applicable to the owner are allowed to find out the taxable income. On that taxable income, sole proprietors pay tax based on the slab rates as applicable to the owner.

Income tax as calculated has to be paid before the due date of filling IT return. If income tax liability amount is in excess of Rs. 10000 then such amount has to be paid in advance otherwise interest at the rate of 1% per month will be charged on income tax that are not paid to IT department.

Permanent Account Number (PAN)

Before filling IT returns for your business income you need to obtain a Permanent Account Number (PAN). PAN is required for all income tax related matters of your business. As proprietorship business has no separate legal identity they cannot be issued a separate PAN for their businesses. So PAN as allotted to the owner is to be used for all income tax purposes related to the proprietorship business i.e. PAN of the proprietor/owner is the PAN of the proprietorship business.

Income tax return form (ITR)

ITR 4S is specifically prescribed for those sole proprietorship business whose main business is playing, hiring or leasing goods carriage and who owns not more than 10 goods carriage at any time during the year. Those persons who want to use section 44AD for their income tax calculation should also use ITR 4S for filing their IT return. ITR 4 has been prescribed for all other sole proprietorship business.

Details such as PAN number, date of birth, Name, current address are required to be provided along with all other details that are required as per IT act.

Books of accounts

If such proprietorship business’s gross receipts or incomes have exceeded Rs. 1000000 or Rs. 120000 respectively in any of the 3 preceding previous years to the previous year for which you are filling your IT return then you have to maintain books of accounts as specified under the IT act.

If the sole proprietorship business is newly set up and such business’s gross receipts or incomes are likely to exceed Rs. 1000000 or Rs. 120000 respectively during the previous year then such sole proprietorship business has to maintain books of accounts as prescribed in IT act.

Proprietorship business can also get covered under section 44AD of IT act if their turnover or gross receipts are up to Rs. 1 crore and they have disclosed their taxable income as greater than equal to 8% of the gross receipts or turnover. In such cases, proprietorship business are not required to maintain books of accounts as required under section 44AA of IT act.

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Income tax audit

As per the provisions of IT act, those sole proprietorship businesses whose turnover is in excess of Rs. 1 crore during the financial year are required to get their books of accounts audited from a chartered accountant in practice.

Such audit report along with the income tax return is required to be filled with income tax department before 30th September of the assessment year for the financial year for which audits are conducted.

Form 3CB and 3CD are two additional reports that are required to be filled as IT audit report along with the income tax return. These two reports will be given by the chartered accountant who has conducted IT audit for your business.

Recommended Read: income tax audit under section 44AB of IT act

Income tax slab rates

Slab rates are same as applicable to an individual. Based on the taxable incomes, taxes are calculated and paid to the IT department.

Recommended Read: Income tax slab rates for the financial year ending 31st march 2014

Due date of filling income tax return

Due dates for sole proprietorship business is the same that that are applicable to individual. For the assessment year 2013-2014 and 2014-2015 due date of filling IT return is 31st July.

However if such individual’s business are required to be audited under section 44AB of IT act then due date of filling income tax return is 30th September of the assessment year.

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