• How-to

Sole proprietorship is a widely-used business form in India. It is the simplest and least costly form of business organization, suitable to entrepreneurs and SMEs. There is no formal registration of sole proprietorship firm as such, but recently the KYC (Know Your Customer) norms of the RBI have made it mandatory to have at least two registrations in the name of a sole proprietorship firm. So, if the sole proprietor is involved in the sale/purchase of goods, he has to obtain a VAT registration. Alternatively, if he provides services, then he has to register himself with the service tax authority.

The second registration required is registration with the local municipal registration or one under the Shops and Establishments Act as per the rules of each state. Sole proprietorship requires the following tax compliances:

Direct Taxes: Income Tax
For sole proprietorship, there is no separate income tax PAN of the firm; PAN of the proprietor is the PAN of the firm. For sole proprietorship there is no need to file separate income tax return of the firm. The personal return of the proprietor will include the income from sole proprietorship firm and he will pay tax according to the income tax slab rates applicable to his total income.

As per the Income Tax Act, if a person’s income from business or profession exceeds Rs.1.2 lakh or sale turnover exceeds Rs.10 lakh, he has to maintain proper books of accounts. But from the year 2010-’11, if a person has a turnover up to Rs.60 lakh and declares minimum 8 percent of the turnover as income, then there is no need to maintain any books of accounts for the purpose of income tax. Further, such an assessee is not liable to get his accounts audited. On the other hand, a sole proprietor who has turnover up to Rs.60 lakh but declares less than 8 percent of that as income, has to maintain his books of accounts and get them audited also.

In sole proprietorship business, the assessee is entitled to all deductions which are applicable to the individual assessee, like deduction u/s 80C for investment in tax saving schemes.

The sole proprietor should file his income tax return in ITR-4 on or before July 31, falling after the end of financial year in case he is not liable to getting his accounts audited and September 30 after each financial year if he is liable to get his accounts audited.

Indirect Taxes: VAT/ Service Tax/Excise
VAT is applicable to all type of dealers uniformly; there is no additional benefit for sole proprietorship. VAT rules vary from state to state and all dealers have to register themselves in the state where they normally have place of business. Most states provide relaxation to small traders/dealers from registration. If any person purchases goods/raw material within the state locally and sells these goods in the same state, they need not obtain registration under VAT for up to Rs.10 lakh turnover. But if a person indulges in the purchase/sale of goods out of state, then he has to register himself with VAT and CST even for Re.1 transaction.

VAT returns are normally quarterly but according to turnover, tax period may vary in different states. Interstate transactions are liable for CST (Central Sales Tax) and one registered dealer can sell goods to the other registered dealer at the concessional rate of tax @2 percent against issue of C forms. There is no VAT/CST on the export of goods out of India. Exporters can purchase goods for exports without paying any tax on the strength of Form H or can get refund of tax paid on goods purchased for export.

Service tax is a central government tax on specified services. Till date, 114 services are covered under service tax and liable for service tax @10.3 percent including education and higher education cess. Application for service tax registration is to be filed on Form ST-1. Service tax is payable by the service provider and he can collect it from service recipient. Service tax is payable on receipt basis of the service charges.

For sole proprietorship, tax has to be deposited within the fifth day after each quarter in Challan form GAR-7 and service tax return in form ST-3 is to be filed half-yearly. Due date of filing of return is October 25 for the first half year ended on September 30 and April 25 for second half year ended on March 31.

Excise duty is applicable to manufacturers of goods and articles. If an assessee manufactures goods of Rs.1.5 crore in any financial year, he has to register himself with the excise office and pay the duty at the specified rate on every sale of excisable goods. Other taxes like professional tax, PF and ESI are applicable to the sole proprietorship firm depending on the number of employees working in the organization.

MUKESH GOEL is a chartered accountant and partner at Mukesh Raj & Company.

©Entrepreneur March 2011

Tags:
Know Your Customer, sole proprietorship, tax, VAT