Running a Sole Proprietorship in India comes with a set of crucial financial and legal responsibilities. Compliance with various tax and regulatory requirements is essential to ensure your business’s smooth operation and growth. This includes filing Income Tax Returns, TDS Returns, GST Returns, EPF Returns, maintaining accurate accounting records, and sometimes undergoing a Tax Audit.

Proprietorship

A sole proprietorship in India is the most basic business setup, where a single individual owns and runs the business.

Income Tax Return filing for Proprietorship

In India, when it comes to taxes, proprietorships have the same responsibilities as their owners. A proprietorship is an extension of the owner, meaning the tax process is quite similar to what individuals go through. The income tax rules that apply to individual proprietors also apply to proprietorships.

• Proprietorships, much like partnerships and companies, are required to pay taxes based on their earnings.
• For tax purposes, proprietors and their businesses are viewed as single entities. The income tax filing process for proprietorships aligns with the tax returns of the Proprietor.
• Since a proprietorship isn’t considered a distinct legal entity, it has no unique tax identification number. Instead, the Proprietor’s Permanent Account Number is used for filing returns on behalf of the proprietorship.

Is it necessary for Proprietorship to File ITR?

Yes, under the Income Tax Act in India, proprietorship firms must file income tax returns based on the age and income of the Proprietor:

• Below 60 Years: Proprietors below 60 years of age must file an income tax return if their total income exceeds Rs. 3 Lakhs.
• Between 60 and 80 Years: Proprietors aged between 60 and 80 must file an income tax return if their total income exceeds Rs. 3 Lakhs.
• Above 80 Years: Proprietors aged 80 years and above must file an income tax return if their income exceeds Rs. 5 Lakhs.

Filing ITR before the deadline is crucial because it allows business losses to be carried forward for future use. Additionally, certain deductions under sections like 10A, 10B, 80-IA, 80-IAB, 80-IB, and 80-IC can only be claimed if the proprietorship’s ITR has been filed on or before the due date.

Income Tax Slab Rate for Proprietorship Firms

The income tax landscape for proprietorship firms has witnessed significant changes in the 2023-2024 budgets. The revised income tax regime has introduced an enhanced tax rebate threshold of Rs. 3 lakh for both salaried individuals and taxpayers. Moreover, the tax rebates for individual and salaried taxpayers have been elevated from Rs. 5 lakh to Rs. 7 lakh under this updated income tax framework.

Tax rates for Proprietors opting for an Alternate Tax Regime under Section 115BAC

An alternative tax regime for proprietors was introduced by Finance Act 2020 as Section 115BAC. Assesses must give up specified exemptions and deductions to take advantage of this tax regime.

The Income tax rate for a Proprietor who opts for the alternate tax regime:

Rates of surcharge under the Normal Tax Regime

In addition to the Income Tax amount calculated, individuals must pay Surcharge and Cess based on the above-mentioned tax slabs.

In respect of a Proprietor, the rate of surcharge for the Assessment Year 2024-25 is tabulated here:

Rates of surcharge under alternate tax regime

For the Assessment Year 2024-25, if a Proprietor chooses the alternate tax regime as per Section 115BAC, the surcharge rate will be 25%, contrasting with the previous rate of 37%.

Presumptive Taxation Scheme for proprietorship

The Presumptive Taxation Scheme for proprietorship is a provision in the Income Tax Act designed to ease the tax burden on small taxpayers in India. Its purpose is to enable small businesses to operate without the heavy compliance obligations. Businesses that opt for this scheme can calculate their income based on an estimated basis using Section 44AD. This scheme allows taxpayers to pay taxes at a minimum rate and eliminates the requirement to maintain detailed accounting records.

Deadline for Proprietorship Tax Return Filing

The deadline for filing an income tax return for a proprietorship in India varies depending on certain factors outlined in the Income Tax Act of 1961:

• No Audit Required: If your proprietorship does not need an audit, the income tax return must be filed by July 31st.
• Audit Required: If your proprietorship requires an audit, the deadline for filing the income tax return is September 30th.
• International Transactions or Specific Entities: The deadline for filing the income tax return is November 30th for proprietorships engaged in international transactions or specific domestic entities.

Required Documents for Proprietorship Income Tax Return Filing

If you’re a sole proprietor looking to file an Income Tax Return (ITR) for your Proprietorship Firm, make sure you have the following essential documents ready:

• PAN Card
• Bank Account Details
• Aadhar Card
• Advance Tax Payment Challan
• Form 16, 16A, and 26AS

Filing an Income Tax Return for a Proprietorship

When it comes to filing ITR for proprietorships, it’s important to note that these businesses are typically required to file annually unless exempted. The income tax of a proprietorship is treated as the owner’s personal income.

Depending on the nature of your proprietorship, you will use one of two forms:

Form ITR-3

ITR-3 form is used to file income tax for proprietorships run by a Hindu Undivided Family (HUF) or any other proprietor.

Form ITR-4 Sugam

Specifically designed for proprietorships under presumptive tax schemes, Form ITR-4 aims to reduce the compliance burden on small businesses.

It’s important to note that the income tax of a proprietorship is considered the same as that of the Proprietor. This means that the business income is added to the Proprietor’s personal income, making the business taxes equivalent to those of the Proprietor. The Proprietor remains eligible for all tax deductions applicable to individuals or Hindu Undivided Families (HUF), as relevant.

TDS Return Filing

TDS returns are mandatory for proprietors with a valid TAN. The type of TDS return to be filed depends on the purpose of deduction, including Form 24Q for TDS on Salary, Form 27Q for TDS involving non-resident foreign companies, Form 26QB for TDS on property transfers, and Form 26Q for TDS in other cases.

GST Return Filing

Proprietors must register their sole proprietorship for GST if their business turnover exceeds Rs. 20 lakhs. Under GST, they must file GSTR-1 and GSTR-3B returns, which detail outward and inward supplies of taxable goods and services, along with tax payments. The chosen GST scheme determines the frequency of filing.

EPF Return Filing

EPF (Employees’ Provident Fund) registration is required for proprietors employing more than 20 individuals. This mandates the filing of EPF returns.

Accounting and Bookkeeping

Sole proprietors must maintain proper books of accounts if their sales/turnover/gross receipts exceed Rs. 25,00,000 or if their business income exceeds Rs. 2,50,000 in any of the preceding three years.

Proprietorship Firm Audit

The audit of a proprietorship depends on its annual turnover and specific circumstances. Here are three scenarios that require an audit:

• Turnover Exceeds Rs 5 Crore: If a proprietorship’s annual turnover crosses Rs.5 crore during the assessment year, it must be audited. This rule applies to businesses involved in trade or commerce.
• Professional Proprietorship with Receipts Over Rs 50 Lakh: An audit is necessary for professional proprietorships like consultancies or service-based businesses if their total receipts go beyond Rs 50 lakh.
• Proprietorship under Presumptive Tax Scheme: Regardless of the annual turnover, it requires an audit if a proprietorship falls under any presumptive tax scheme.

The regulations for auditing a proprietorship are outlined in the Income Tax Act of 1961, stating that a certified Chartered Accountant (CA) must conduct the audit. This audit ensures that the financial information of the proprietorship is accurate and complies with the law.