Guide to corporate tax filing for small business in India
Tax season is surely one of those times in a business owner's life when time and expertise are of the highest importance.
Even seasoned professionals become nervous when it comes to filing taxes correctly; it's no surprise that this may be especially stressful for small business owners.
Using creative financial management software that streamlines your bookkeeping, on the other hand, may alleviate the stress of corporate tax filing.
If you want to learn everything there is to know about small business tax filing and how to navigate the complexity of tax season in India, then our beginner's guide is the right tool in your arsenal!
Continue reading to learn more about the complexities of filing corporate taxes.
What are small business taxes?
As a small business owner, the Indian government taxes all of your earnings in a given year through the Central Board of Direct Taxes (CBDT), also known as the Income Tax (IT) Department.
All types of small enterprises, from a solopreneur to SMEs and large enterprises, must pay these taxes.
It is even more crucial to understand that small firms are scrutinized more closely than large organizations when it comes to corporate tax filing since SME owners are more prone to tax evasion or inaccurate tax filing.
Small business taxes vary widely depending on structure, income level, and other factors.
What type of small businesses are required to file taxes in India?
Being aware of your business structure makes it easier to acquire relevant forms and keep yourself updated with the necessary laws and regulations.
Broadly speaking, there are 3 types of business organizations common in India.
1. Sole proprietorship
It refers to single-person ownership over the entirety of a business. In this type of business, it is not just the ownership but also the management of business activities that are carried out by a single individual.
2. Domestic companies
This business structure consists of owners, shareholders, and managers operating a company. It can be either private or public, a small-scale business, or even a start-up initiative.
3. Firm/Limited Liability Partnerships (LLP)
A partnership is a mutual agreement between two or more parties that agree to carry out a common business. However, there is a clear distinction between a firm and LLP vis-a-vis liability.
In an LLP, partners hold separate obligations, profit-sharing ratios, and liability towards the company, whilst having their separate legal entity.
However, in a firm, the liability and legal entities between partners and the business are the same.
Why is small business tax filing important?
Small business owners in India deal with a lot on their plate. Since there is no dedicated accounting personnel to manage and record company expenses, the owners usually end up donning the accounting hat.
Even if they do reach out to accounting firms, without any real-time updates and enormous paperwork, the chances of tax filing errors increase drastically.
When it comes to GST, small businesses are compulsorily required to file it every month.
The burden of GST compliance information is overwhelming, not to mention the heavy penalty levied on defaulters. Keeping track of different business tax filing deadlines can only add to this burden.
Even so, filing your taxes remains crucial as ever.
Tax evasion is an illegal and serious crime, and can adversely affect your business as well as personal life. There are monetary and legal repercussions for missing out or misreporting business tax filing.
Not only that, your business can face an audit, which is extremely time-consuming, sometimes lasting for months.
Audits are also expensive, forcing you to invest your capital in hiring attorneys, Certified Public Accountants (CPAs), etc. A government-issued audit impacts negatively on a company’s reputation, and by extension, the owner’s reputation as well.
What type of taxes do small businesses have to pay in India?
Taxes in India are divided into Direct and Indirect Taxes. Below mentioned are examples of some types of taxes small business owners have to keep in mind.
Remember that these values are subject to amendment as per the Indian government. Therefore, be sure to regularly check the taxes that are relevant to your business.
- Income Tax
- Wealth Tax [Sole proprietor: > 1 Crore ; Companies: >10 Crore]
- Minimum Alternate Tax (MAT)
- Dividend Distribution Tax (DDT)
- Fringe Benefits Tax
- Goods and Services Tax (GST) [rate slab for respective goods and services]
- Health and Education Cess
Steps to file company tax returns in India
It is now time to file your tax return after conducting extensive study on which taxes relate to your firm.
To ensure a fast and structured tax filing procedure follow these steps.
1. Thoroughly document and maintain financial records
During tax season, organization is essential. Ensure that you have easy access to all of your financial information and documentation.
Here is a list of financial necessities you should plan for throughout the fiscal year.
• Taxpayer ID number
• Bank account & Credit card statements
• Your previous year's company tax return
• Relevant accounting information needed for accurate filing such as GST, Fringe Benefits Tax (FBT) returns, etc.
Notably, despite the fact that the taxpayer is not required to attach any documents to Income Tax Return forms and that these forms are attachment-less, the taxpayer should keep these records and be prepared to present them to the tax authorities upon request in circumstances such as assessment, inquiry, etc.
The enormous flow of transactions and statements that circulate throughout the year makes it difficult for you to manually organize these records.
Consider investing in an automated financial management solution like Volopay, which can help you have a stress-free tax season, to simplify and streamline your tax filing process.
2. Be familiar with your small business tax deductions
Knowing all the tax deductions you are eligible to claim can save you a ton of money by preventing you from having to pay obscene amounts in taxes.
Here are some typical tax deductions you can claim to reduce your taxes, albeit they depend on the type of business you have and the sector it operates in.
• Office/commercial space rent
• Office supplies, machinery and equipment
• Business-related insurance
• Business meals (for eg., client lunches, etc.)
• Vehicle and vehicle-related expenses
You can locate business write-offs with ease if you have a well-organized overview of your spending.
It is vital for business owners to be knowledgeable about both their tax liabilities and strategies for reducing their tax obligations.
3. Understand the business tax return forms and the laws
Different business structures necessitate using various business tax return forms and abiding by regulations created especially for pertinent business organizations.
Know all the forms that are required for your business organization.
1. Sole proprietorship (ITR-3)
This Return Form is to be used by an individual who is having income under the head “profits or gains of business or profession” i.e. a sole proprietorship.
• For physical paper-based tax filing, print and fill FORM ITR-3
• For electronic filing, learn how to fill out FORM ITR-3
• For a detailed instruction manual on how to fill ITR-3, click here
2. Firm/LLP (ITR-5)
This Return Form is used by partnerships both with and without personal and joint liability i.e businesses that are and are not legally separated entities from their partners.
• For physical paper-based tax filing, print and fill FORM ITR-5
• For electronic filing, learn how to fill out ITR-5
• For a detailed instruction manual on how to fill ITR-5, click here
3. Domestic Company (ITR-6)
Any Indian company, that has incorporated itself for declaration and payment within India can use these return forms.
• For physical paper-based tax filing, print and fill FORM ITR-6
• For electronic filing, learn how to fill out ITR-6
• For a detailed instruction manual on how to fill ITR-6, click here
4. File your business taxes by the correct deadline
The implications of not filing for an extension and missing the deadline can be a big dent in your company’s finances. Make sure you adhere to the guidelines and keep documentation up to date and ready to avoid any delay.
There are different due dates for different types of business organizations.
Sole Proprietorship
- Individual/HUF whose accounts are to be audited or partner of a firm whose accounts are to be audited or the spouse of such partner if the provisions of section 5A apply
- Filing of return where a taxpayer (corporate/non-corporate including partners of the Firm) is required to furnish a report in Form No. 3CEB under section 92E
- In all other cases
Firm/LLP
- Firm/LLP who is required to get its accounts audited under the Income-tax Act or under any other law
- Firm/LLP who is required to furnish a report in Form No. 3CEB under section 92E
- In all other cases
Domestic Company
- Filing return of income by a Company
- Assessee having an international transaction or specified domestic transaction(s) who is required to furnish a report in Form No. 3CEB
How to calculate business tax payments?
To help small business owners correctly pay their taxes and file returns, the IT Department offers various customized tax tools for all kinds of business structures.
Simply click on the structure that’s relevant to your business and the official CBDT site will curate a list of tax tools needed to file your taxes effortlessly.
You can check out the Income Tax Department’s Tax Tools for free.
Also, read our article to know more about the incentives or tax credits for R&D activity
What are the benefits of regularly filing your business taxes?
Waiting until the due date for your business taxes can be a serious error. This not only makes tax time very stressful, but it also increases the likelihood that your business will file inaccurate taxes.
Since incorrect tax filing may be mistaken for tax evasion, fines may apply.
Therefore, filing quarterly estimated taxes is regarded as wise financial planning.
Of course, a well-organized database for all of your transactions and accounting procedures is essential to a systematic tax filing system.
An automated expense management tool like Volopay may make your tax season stress-free and simple for all of these reasons and many more.
1. Avoid penalties
If you are found guilty of tax evasion (by failing to submit an extension request or missing a deadline), the punishment may be up to three times the amount of the tax owed and/or 7 years in prison.
As a result, it is advisable to consistently estimate your quarterly taxes by up to 5%.
If you overpay, the government will reimburse you for the difference.
2. Better financial planning and budgeting
Paying as you go each quarter is a wiser financial choice than taking a lump sum deduction at the end of the fiscal year.
Due to more in-depth analysis brought about by paying smaller sections, it also helps you make fewer tax-related mistakes.
You can create a complete quarterly budget and optimize your spending by factoring in a tax estimate each quarter.
3. Cashflow management
Cashflow is very important for your business. You require it to pay for daily operating costs, personnel salaries, and taxes.
By dividing your tax lump sum into four smaller quarterly payments, you may simply determine how much cash flow you'll need for the whole fiscal year without worrying about making a mistake on your tax return.
How can automated expense management software help in filing small business taxes?
Even though tax season only lasts a few months, planning for it takes place all year round. When done manually, compiling transactions and verifying bank and credit card statements is a laborious operation.
With the use of automated expenditure management software, you can conveniently obtain frequently updated tax information by organizing and categorizing all of your business spending according to employee, department, and even projects.
Volopay does more than any other platform to get you ready for the dreaded tax season. You may maintain thorough records with Volopay by adding receipts to a centralized database for all of your business spending.
All of your transactions, whether they include a corporate card spend or a vendor payout, are methodically structured in the cloud where you can easily access them for bookkeeping and auditing needs.
Speaking of bookkeeping, Volopay instantly and effortlessly interfaces with any accounting software currently in use, removing the need for manual data entry between different platforms.
You may concentrate the efforts of your financial team on identifying more tax-saving opportunities than ever before with less manual tax filing work to do.
With Volopay, you get access to extensive, current, and comprehensive spend analytics data and insights regarding overspending, enabling you to manage your costs and make better business decisions.
Find out how businesses worldwide have streamlined and simplified their spend management with Volopay.
The information provided in this article doesn't constitute legal or fiscal advice and is for general instructional purposes only. Please check with an attorney or financial counsel to gain advice with respect to the content of this article.