Compliances for Partnership Firms in India
Compliances for Partnership Firms in India
Any company registered in India, including partnership firms, must adhere to compliances set by regulatory authorities. These obligations typically involve filing annual returns, maintaining proper accounting records, adhering to tax regulations, and fulfilling statutory requirements. Partnership firm compliance is necessary to ensure transparency, accountability, and legality in business operations, safeguarding stakeholders’ interests and maintaining the integrity of the business. This article will delve into detailed information regarding partnership firm compliance requirements in India.
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Get Started!What is a Partnership Firm?
A partnership firm in India is a business structure where two or more people come together to manage and operate a business to make a profit. In a partnership firm, the partners contribute capital, share responsibilities, risks, and profits according to the terms of the partnership agreement. This type of business structure is governed by the Indian Partnership Act of 1932, which outlines partners’ rights, duties, and liabilities. Unlike a corporation, a partnership firm does not have a legal existence on its own, and the partners are liable for the debts and obligations of the business.
What are the Compliances involved in a Partnership Firm?
Below, we have the periodic and annual compliances that the Partnership Firm in India must follow:
1. Income tax return filing
Partnership firms are taxed at a rate of 30% of their total income. However, a crucial aspect to remember is that each partner’s share of the profit/loss is reflected in their income tax returns. Partners are taxed according to the individual income tax slabs. This is the only annual compliance the partnership firm must make in India.
Partnership firms have two options for filing their Income Tax Return (ITR):
- ITR-4: This form applies to firms with a total income of up to ₹50 lakh and income from business and profession recorded on a presumptive basis.
- ITR-5: This form is mandatory for firms required to undergo a tax audit, typically those with a turnover exceeding ₹1 crore in the previous financial year.
2. GST return filing
Partnership firms with an annual turnover exceeding ₹40 lakh (subject to change) must register for Goods and Services Tax (GST). Registered firms need to file regular GST returns, typically including GSTR-1 (supplies), GSTR-3B (consolidated return), and GSTR-9 (annual return). Firms opting for the composition scheme may need to file GSTR-4 instead.
3. TDS return filing
Partnership firms functioning as deductors (with a valid TAN) must deduct tax at source (TDS) on specific payments exceeding prescribed limits. This applies to payments like rent, interest, professional fees, etc. TDS challans need to be deposited with the government authorities within stipulated timelines. Different forms are used for TDS returns depending on the nature of the payment (e.g., Form 24Q for salary and Form 26QB for immovable property transactions).
4. EPF return filing
Partnership firms employing more than 20 people must register for the Employee Provident Fund (EPF) scheme. This necessitates regular filing of EPF challans, contributing to employees’ retirement savings.
5. Accounting and Bookkeeping
Partnership firms must maintain proper books of accounts if their annual sales/turnover/gross receipts exceed ₹25 lahks or their income from business surpasses ₹2.5 lahks in any of the preceding three financial years.
6. Tax Audit
Generally, partnership firms with a total business turnover exceeding ₹1 crore in the preceding financial year are required to undergo a tax audit by a Chartered Accountant. This limit may be increased to ₹10 crore (subject to confirmation in upcoming budgets) if cash receipts are limited to 5% of the gross receipts or turnover. A tax audit independently assesses the firm’s financial statements and ensures adherence to tax regulations.
7. Intimation of Changes
Any modifications to the partnership deed, such as additions or removals of partners, capital contribution changes, or dissolution, must be intimated to the Registrar of Firms within 90 days. The other changes include:
- Update of firm name, principal place of business, or nature of business.
- Notification of opening or closing of branches.
- Change of partner information, including name or address.
- Changes to the partnership agreement or dissolution of the firm.
Also read: What is the difference between company and partnership?
Consequences for Non-Compliance of Partnership Firm
You could face the following consequences if your partnership firm is prone to non-compliance.
- Penalties: Regulatory authorities may impose monetary penalties for failing to meet compliance obligations. These penalties can differ based on the nature and severity of the non-compliance.
- Legal Action: Non-compliance may result in legal action against the partnership firm. This could include lawsuits filed by regulatory authorities or affected parties, leading to litigation expenses and potential damages.
- Loss of Reputation: Non-compliance can damage the reputation of the partnership firm, leading to a loss of trust among stakeholders, including customers, suppliers, and investors.
- Business Disruption: Regulatory actions or legal proceedings initiated due to non-compliance can disrupt the normal operations of the partnership firm. This may result in financial losses, operational inefficiencies, and business interruptions.
- Revocation of Licenses or Registrations: Regulatory authorities may revoke licenses or registrations obtained by the partnership firm if it fails to comply with the prescribed regulations. This can prevent the firm from conducting certain business activities legally.
- Injunctions: Courts may issue injunctions prohibiting the partnership firm from engaging in certain activities until compliance is achieved. Violating injunction orders can lead to further legal consequences.
- Criminal Liability: In cases of serious non-compliance or fraudulent activities, individuals associated with the partnership firm, such as partners or officers, may face criminal charges, resulting in fines, imprisonment, or both.
Conclusion
Partnership firms in India must comply with various regulations to ensure legal and transparent business operations. These compliances for partnership firms include filing income tax returns, adhering to GST regulations, maintaining proper accounts, and undergoing tax audits when applicable. Following these requirements safeguards stakeholders’ interests, maintains the firm’s reputation, and avoids penalties or legal action.
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