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Manage Your Accounting & Annual Compliances For Partnership Firms

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The Partnership Act has been in existence in India since 1932, making partnerships one of the oldest types of business entities in India. A partnership firm can even be registered after it is formed. There are as such no penalties for non Registration of a Partnership firm.

But unregistered Partnership firms are denied certain rights under section 69 of the Partnership Act that majorly deals with the effects of non Registration of Partnership firms.

The income tax defines a Partnership firm as “Persons who have entered into a partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. Hence, a firm that does not have a registration certificate from the registrar is an unregistered Partnership firm.

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Checklist for Partnership Compliance

What is the tax rate for a partnership firm?
A partnership firm is required to file a partnership firm income tax return under the Income Tax Act,1961. Partnership firms are liable to pay income tax at the rate of 30% of total income. Besides, a partnership firm is liable to pay an income tax surcharge of 12% if the total income exceeds Rs.1 crores.
Additional to the income tax and surcharge a partnership firm must pay the education cess and the secondary higher education cess.
Education Cess is applicable on the amount of the income tax and the applicable surcharge at the rate of 2%. Secondary and higher education cess is applicable on the amount of the income tax and the applicable surcharge at the rate of 1%.

Alternative minimum tax
Similar to a private limited company or LLP, partnership firms are also required to pay alternate minimum tax at the rate of 18.5% of "adjusted total income". Alternate minimum tax would be increased by the applicable surcharge, education cess, and secondary and higher education cess.

Partnership Firm Tax Return Due Date:
The due date for filing the partnership tax return filing is dependent on whether the firm is required to be audited or not. When the firm is not required to be audited the income tax returns should be filed by 31st July. When the firm is not required to be audited then the firm has to file its income tax returns by 30th September.
However, the cost of compliance is lesser as compared to the companies. Unlike companies, partnerships need not conduct meetings or maintain a register. Hence, it should be noted non - compliance can be costlier than meeting compliances.

Deductions on Annual Compliance for Partnership Firm

While calculating the payable income tax an individual must check the available deductible income:

  • Remunerations or interest paid to the partners of the firm is not under the terms of the partnership.
  • Salaries, bonuses, remunerations, commissions paid to the non-working partners of the firm.
  • If remuneration paid to partners is following the terms of the partnership deed but such transactions were made or were concerning anything that pre-dates the partnership deed.

Audit Requirements for Partnership Firm

Partnership firms that satisfy any of the conditions below would be required to get accounts audited:

  • Carrying on business and total sales exceed Rs.1 crore in the previous year.
  • Carrying on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
  • Besides, there are other conditions applicable that could make an audit mandatory for a partnership firm.
If a partnership firm entered into international transactions or specified domestic transactions a report must be furnished in Form No. 3CEB under section 92E. For partnership firms required to furnish Form 3CEB, the deadline for filing a tax return is 30th November.

Documents required for Partnership Firm Annual Compliances

The documents required will vary depending on the service you require. Our professionals will convey the same to you based on your requirements.

Assessment of Partners

  • After the firm pays the tax, no tax will be payable by the partners on the share of income from the firm.
  • Interest amount or remuneration etc. received by a partner will be taxed as 'Business or Professional Income', excluding the amount disallowed in the hands of the firm being more than limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in S. 144 or non-compliance of S. 184.
  • The partner’s share (including a minor admitted for the benefit of the firm), in the income of the firm is not included in computing his total income i.e. his share in the total income of the firm shall be exempt from tax under section 10(2A) of the Act.

Procedure for Filing Annual Compliance For Partnership Firms

For Partnership income tax return filing should be done through Form ITR-5. This form ITR-5 is used to partnership firm income tax returns and not the tax returns for the partners.
Like all other income tax forms, ITR 5 is an attachment-less form and there is no requirement to submit any documents or statements along with the partnership firm tax returns. However, the taxpayers must save the records about business and produce the same before the tax authorities when requested.
ITR-5 can be filed online with the income tax department's online portal. The documents need to be submitted only when they are asked for. While filing the Partnership firm tax returns the partners must have class 2 digital signatures for verification of the filing process.

Procedure for filing Income tax returns of a partnership firm:
The income tax return of a partnership firm can be filed online through the income tax website or manually. If the income tax return is filed online then a class 2 digital signature will be required for the partner of the firm. Also, online income tax return filing is mandatory for partnership firms required to obtain an audit.
In case of manual filing, the assessee must print out two copies of Form ITR-V. One copy of ITR-V signed by the assessee has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bengaluru - 560100 (Karnataka). The other copy should be retained by the assessee for his/her record.

Why for Accounting & Business Compliance

As a benefit of working with industry specialists, our team will keep track of all changes to the various relevant regulations and keep you up to date and compliant. Our accounting and compliance team will collaborate closely with you to identify all needs and ensure that the procedure is completed on time. Our experts will assist you in a broad spectrum of financial services that cover:

  • Basic financial consultation:
    We have expert chartered accountants and financial professionals who offer basic financial consultation that your company needs.
  • Bookkeeping:
    Bookkeeping is a process of recording financial transactions and information on a daily basis. The account bookkeeping services may include payments made to suppliers, loan payments, customer invoice payments, monitoring asset depreciation, and generating financial reports.
  • Preparation of accurate annual financial statements and monthly reports:
    The balance sheet, income statement, and cash flow statement provide information on the company's financial position, including an overview of assets and liabilities, as well as stockholders' equity. It also helps in understanding the company's earnings and expenditures, as well as how the company pays its obligations and meets its operating expenses.
  • Assistance in designing invoices:
    Invoices are records of a company's sales transactions. They include information on the shipment, such as the quantity of items, item descriptions, total sale price and selling price per item, terms of sale, buyer and seller information, amount due, invoice number, payment method, and payment due date. Invoices establish the legal rights, wherein if the customer fails to make the due payment, the company can take it forward legally.
  • Basic taxation advisory:
    Our taxation experts offer the best-in-class tax planning strategies that are suitable for your business structure. We understand the changing tax regimes in India and offer timely information.

FAQs on Annual Compliances For Partnership Firms

Partnership firms are not required to make an audited financial statement each year. The tax audit may be necessary based on the turnover and other criteria.

The compliance for partnership firms mainly includes the income tax return filing unlike the corporate entities like the LLP and the company as they have to make income tax return filings as well as the annual return filing.

For filing the returns of a Partnership firm Invoices of sales and the purchases during a year, expenses invoice, bank statements of the partners, TDS return filed copy, GST returns filing copy is required.

The partnership deed contains all the Terms and conditions of the Partnership. It regulates the rights and the duties of each partner making the partnership deed a very crucial document.

The partnership firm and the partners of this firm are considered to be the same. In the case of the partnership firms, the liability of the partners is also unlimited and all the partners are jointly responsible for the liabilities of the firm.

Irrespective of the turnover and the profit or losses made by the partners, the partnership is required to file income tax returns.

There are certain limitations on the transfer of ownership of a partnership. A partner cannot transfer the partnership without the consent of all the partners.

Yes, it is possible to convert a partnership firm into a company or an LLP. The process of conversion is very cumbersome. Hence, the entrepreneur should consider starting an LLP or a company instead of opting for a Partnership.

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