1) PRIVATE LIMITED COMPANY

  • Private Limited Company is the most prevalent and popular type of corporate legal entity in India.

  • To register a private limited company, a minimum of two shareholders and two directors are required. A natural person can be both a director and shareholder, while a corporate legal entity can only be a shareholder.

  • Unique features of a private limited company like limited liability protection to shareholders, the ability to raise equity funds, separate legal entity status and perpetual existence make it the most recommended type of business entity.

READ MORE

2) LIMITED LIABILITY PARTNERSHIP (LLP)

  • Limited Liability Partnership (LLP) was introduced in India by way of the Limited Liability Partnership Act, 2008.

  • The main advantage of a Limited Liability Partnership over a traditional partnership firm is that in an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.

  • However, unlike private limited company shareholders, the partners of an LLP have the right to manage the business directly.

  • LLP is one of the easiest forms of business to incorporate and manage in India. With an easy incorporation process and simple compliance formalities, LLP is preferred by Professionals, Micro and Small businesses that are family-owned or closely-held.

  • Since LLPs are not capable of issuing equity shares, LLP should be used for any business that has plans for raising equity funds during its lifecycle.

READ MORE

3) PARTNERSHIP

  • A Partnership Firm is a popular form of business constitution for businesses that are owned, managed and controlled by an Association of People for profit.

  • It is not compulsory to register a Partnership firm; however, it is advisable to register a Partnership firm due to the added advantages.

  • Partnership firms are created by drafting a Partnership deed among the Partners.

READ MORE

4) PROPRIETORSHIP

  • A sole proprietorship is a type of unregistered business entity that is owned, managed and controlled by one person.

  • Sole proprietorship’s are one of the most common forms of business in India, used by most micro and small businesses operating in the unorganized sectors.

  • Proprietorships are very easy to start and have very minimal regulatory compliance requirements for started and operating. However, after the startup phase, proprietorships does not offer the promoter a host of benefits such as limited liability proprietorship, corporate status, separate legal entity, independent existence, transfer-ability, perpetual existence – which are desirable features for any business.

  • All the registrations for a proprietorship would be in the name of the Proprietor, making the Proprietor personally liable for all the liabilities of the Proprietorship.

READ MORE

5) GOODS AND SERVICE TAX (GST)

What is the Goods and Services Tax (GST)?

The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services. In effect, GST provides revenue for the government.

The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of certain goods and services. The business adds the GST to the price of the product, and a customer who buys the product pays the sales price plus GST. The GST portion is collected by the business or seller and forwarded to the government. It is also referred to as Value-Added Tax (VAT) in some countries.

Which Countries Collect the GST?

France was the first country to implement the GST in 1954, and since then an estimated 160 countries have adopted this tax system in some form or another. Some of the countries with a GST include Canada, Vietnam, Australia, Singapore, United Kingdom, Monaco, Spain, Italy, Nigeria, Brazil, South Korea, and India.

India’s Adoption of the GST

India established a dual GST structure in 2017, which was the biggest reform in the country’s tax structure in decades. The main objective of incorporating the GST is to eliminate the tax on tax or double taxation, which cascades from the manufacturing level to the consumption level. For example, a manufacturer that makes notebooks obtains the raw materials for, say, Rs. 10, which includes a 10% tax. This means that he pays Rs. 1 in tax for Rs. 9 worth of materials. In the process of manufacturing the notebook, he adds value to the original materials of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The 10% tax due to the finished goods will be Rs. 1.50. Under a GST system, this additional tax can be applied against the previous tax he paid to bring his effective tax rate to Rs. 1.50 – Rs. 1.00 = Rs. 0.50.

The wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at an Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the goodwill be Rs. 1.75, which he can apply against the tax on the original cost price from the manufacturer i.e. Rs. 15. The wholesaler’s effective tax rate will, thus, be Rs. 1.75 – Rs. 1.50 = Rs. 0.25.

If the retailer’s margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19) – Rs. 1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will be Rs. 1 + Rs. 0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90.

India has, since launching the GST on July 1, 2017, implemented five different tax rates.

A 0% tax rate applied to certain foods, books, newspapers, homespun cotton cloth, and hotel services under Rs. 1000.

A rate of 0.25% applied to rough industrial diamonds.

A 5% tax rate applied to apparel below Rs. 1000, packaged food items, footwear under Rs. 500, etc.

A 12% tax rate applied to apparel over Rs. 1000, frozen meats, cutlery, sugar, bio-diesel, etc.

An 18% tax rate applied to certain luxury items including makeup, pastries, swimming pools, footwear costing more than Rs. 500, etc.

The final bracket, taxing goods at 28%, applied to 50 luxury products and those deemed “sinful,” including sunscreen, ceramic tiles, bidis (Indian cigarettes), cars, motorcycles, etc.

The previous system with no GST implies that tax is paid on the value of goods and margin at every stage of the production process. This would translate to a higher amount of total taxes paid, which is carried down to the end consumer in the form of higher costs for goods and services. The implementation of the GST system in India is, therefore, a measure that is used to reduce inflation in the long run, as prices for goods will be lower.

What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.

  • CGST: Collected by the Central Government on an intra-state sale (Eg: transaction happening within Maharashtra)

  • SGST: Collected by the State Government on an intra-state sale (Eg: transaction happening within Maharashtra)

  • IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction
New Regime
Old Regime
Sale within the State
CGST + SGST
VAT + Central Excise/Service tax
Sale to another State
IGST
Central Sales Tax + Excise/Service Tax

Illustration:

  • Let us assume that a dealer in Gujarat had sold the goods to a dealer in Punjab worth Rs. 50,000. The tax rate is 18% comprising of the only IGST.

In such a case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to the Central Government.

  • The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The GST rate on the good is 12%. This rate comprises of CGST at 6% and SGST at 6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the Central Government and Rs. 3,000 will go to the Gujarat government as the sale is within the state.

What changes has GST brought in?

In the pre-GST regime, every purchaser including the final consumer paid tax on tax. This taxon tax is called the Cascading Effect of Taxes.

GST has removed this cascading effect as the tax is calculated only on the value-addition at each stage of the transfer of ownership. Understand what the cascading effect is and how GST helps by watching this simple video:

This indirect tax system under GST has improved the collection of taxes as well as boosted the development of the Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.

Illustration:

Based on the above example of the biscuit manufacturer along with some numbers, let’s see what happens to the cost of goods and the taxes in the earlier and GST regimes. Tax calculations in earlier regime:

Action
Cost
10% Tax
Total
Manufacturer
1,000
100
1,100
Warehouse adds a label and repacks @ 300
1,400
140
1,540
Retailer advertises @ 500
2,040
204
2,244
Total
1,800
444
2,244

Along the way, the tax liability was passed on at every stage of the transaction and the final liability comes to rest with the customer. This is called the Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps increasing every time this happens. Tax calculations in the current regime:

Action
Cost
10% Tax
Actual Liability
Total
Manufacturer
1,000
100
100
1,100
Warehouse adds a label and repacks @ 300
1,300
130
30
1,430
Retailer advertises @ 500
1,800
180
50
1,980
Total
1,800
180
1,980

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in acquiring input. What happens in this case is, the individual who has paid a tax already can claim credit for this tax when he submits his taxes. In the end, every time an individual is able to claim the input tax credit, the sale price is reduced and the cost price for the buyer is reduced because of lower tax liability. The final value of the biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus reducing the tax burden on the final customer. GST regime also brought a centralized system of waybills by the introduction of “E-way bills”. This system was launched on 1st April 2018 for the Inter-state movement of goods and on 15th April 2018 for the intra-state movement of goods in a staggered manner. Under the e-way bill system, manufacturers, traders & transporters are now able to generate e-way bills for the goods transported from the place of its origin to its destination on a common portal with ease. Tax authorities are also benefitted as this system has reduced time at check -posts and helps reduce tax evasion.

READ MORE

6) INCOME TAX RETURN (ITR)

A tax return is defined as a form or different types of forms filed with a taxing authority that reports income, expenses, and other pertinent tax information. Tax returns make it simple for taxpayers to calculate their tax liability, schedule tax payments and request refunds for the overpayment of taxes. All taxpayers who are filing their income tax returns are required to determine the type of income tax return (ITR) form they need to fill before actually filing their returns. The form to be filled is solely dependent on the income that the taxpayer earns, or in certain cases if the taxpayer holds assets in a country other than India or earns any form of income from a country other than India.

Different types of ITR forms

In total, there are almost 9 types of ITR forms available for a taxpayer to file his taxes. However, only the following forms are to be taken into consideration by individuals when filing returns as per the Central Board of Direct Taxes in India:

  • ITR-1

  • ITR-2

  • ITR-2A

  • ITR-3

  • ITR-4

  • ITR-4S

The following income tax return forms are applicable only for companies and firms:

  • ITR-5

  • ITR-6

  • ITR-7

ITR-1

Also known as the Sahaj form, this income tax return form is to be filed solely by an individual taxpayer. Any other assessee liable to pay tax is not eligible to avail of this form for filing their returns. This form applies to the following people:

  • A person who earns his income via salary or through other means such as pension

  • A person who earns his livelihood from a single housing property

  • An individual who has no income from no other business or who have no income from the sale of any assets i.e. capital gains

  • Individuals who do not own any assets or property in countries apart from India

  • An individual who has no source of income from any country outside India

  • A person whose income from agriculture is below Rs. 5,000

  • A person whose source of income is from various investments or sources like investments, schemes or fixed deposits, etc.

  • Individuals who have not earned income from any windfall such as lotteries, horse racing, etc.

  • People who want to accumulate their spouse’s or underage child’s income with their own, as long as the income to be clubbed is in accordance with the criteria mentioned above.

ITR-2A

Introduced in the assessment year 2015-16, The ITR-2A form is a new income tax return form. This form can be used by a Hindu Undivided Family (HUF) or an individual taxpayer. The ITR-2A form is applicable for the following people:

  • People whose source of income I through salary or through means such as pension

  • People who are also earning income from more than one housing property

  • A person who has no income from any other business or who have no income from the sale of any assets i.e. capital gains

  • People who tend to earn income from different investments or sources such as Fixed Deposits, Investments, Shares, etc.

  • A person who does not own any property or assets in countries other than India

  • A person who does not have a source of income from any country outside India

  • A person whose income from agriculture is below Rs 5,000

  • Individuals who have not earned income from any windfall such as lotteries or horse racing

ITR-2

The ITR-2 Form is a type of ITR form which is generally used by individuals who have accrued income through the sale of assets or property. Also, this form is useful for individuals who earn income from countries outside India. In most cases, individuals or Hindu Undivided Families (HUF) can avail of this form to file their IT returns. This form is applicable to the following persons:

  • People who earn income through salary or through means such as pension

  • A person whose source of income is through the sale of assets or property in India i.e. capital gains

  • A person who tends to earn income from more than one housing property

  • People who don’t earn money from any business venture

  • A person who own assets in countries outside of India

  • People who earn income from countries outside of India

  • A person whose income from agriculture is above Rs 5,000

  • A person who gets his income from any windfall like lotteries or horse racing

ITR-3

The ITR-3 Form is useful for an individual taxpayer or a Hindu Undivided Family, who solely operates as a partner in a firm but who does not conduct any business under the firm. This is also applicable for individuals who do not earn any income from the business conducted by the firm. This form is usually filed by those taxpayers whose taxable income earned from the business is only in the form of the following:

  • Salary

  • Commission

  • Bonus

  • Interest

  • Remuneration

ITR-4

This type of ITR form is useful for those individuals who conduct a business or who earn income through a profession. This form is applicable for all types of businesses, undertaking or profession, without any limit on the income earned. Taxpayers can also club any income they receive from windfalls, speculation, salaries, lotteries, housing properties, etc., along with the income earned from their business. An individual with any profession, right from shopkeepers, doctors or designers to agents, retailers, and contractors, is eligible to file their ITR using this form.

ITR-4S

Also known as Sugam form, the ITR-4S form can be used by any individual or Hindu Undivided Family (HUF) for filing their income tax returns. This form is applicable to the following persons:

  • Individuals who earn income from any business

  • Individuals who earn income from a single housing property

  • Individuals who do not earn income through the sale of assets or property in India i.e.: capital gains

  • Individuals whose income from agriculture is below Rs 5,000

  • Individuals who do not own any assets or property in countries other than India

  • Individuals who do not earn income from any country outside India

This form is useful in special circumstances and applies to businesses where any income earned is based on a presumptive method of calculation.

ITR-5

The ITR-5 form is used only by the following bodies to file income tax returns:

  • Firms

  • Limited Liability Partnerships (LLPs)

  • Body of Individuals (BOIs)

  • Association of Persons (AOPs)

  • Co-operative Societies

  • Artificial Judicial Persons

  • Local Authorities

ITR-6

Except for those companies or organizations that claim tax exemption as per Section 11, the ITR-6 form is used only by all companies. Organizations that can claim tax exemptions as per Section 11 are organizations in which the income received is accumulated from the property used for the purpose of religion or charity. This particular income tax return form is only available to be filed online.

ITR-7

Those individuals or companies that are required to submit their returns under the following sections are required to file their income tax returns through ITR-7:

  • Section 139(4A) – Under this section, returns can be filed by individuals who receive income from any property that is held for the purpose of charity or religion in the form of a trust or legal obligation

  • Section 139(4B) – Under this section, returns are to be filed by political parties provided their total income earned is above the non-taxable limit

  • Section 139(4C) – Under this section, returns are to be filed by the following entities:

  • Any institution or association mentioned under Section 10(23A)

  • Any association involved with scientific research

  • Any institution mentioned in Section 10(23B)

  • Any news agency

  • Any fund, medical institution or educational institution

  • Section 139(4D) – Under this section, returns are to be filed by entities such as colleges, universities or any other such institution wherein income returns or loss is not required to be provided in accordance with other provisions outlined in this section.

READ MORE