Operating a partnership firm in India is relatively easy and is often viewed as one of the easiest and most flexible ways to operate. Compared to companies, partnership firms do not have many compliance requirements, which make them attractive to small and medium-sized entrepreneurs, however, just because the compliance requirements are somewhat lighter, doesn't mean it is not something we should take care of.
In this article we'll explain everything you need to know relating to annual compliance for partnership firms in India, covering tax filings, record-keeping to enable you to be compliant and successful while focusing on growing your practice.
Why Is Annual Compliance Important For A Partnership Firm
Annual compliance is not so much about the legal formalities that businesses must comply with, however, it is much more important to each and every entrepreneurs journey. Establishing compliance through:
- Avoiding Penalties: Filing returns and records on time means you do not have to pay fines or incur interest.
- Building Credibility: A compliant company presents professional credibility to banks, investors and clients.
- Smoother Banking and Loan Process: When you apply for loans, lenders will typically ask for tax returns and financial statements.
- Peace of Mind: If you are compliant with your returns and filings, you won't have to face the same sudden shock of notices from the Income Tax Department or state agencies.
Think of it as an investment in your firm's future.
Key Annual Compliances for a Partnership Firm
Now, let's explore the key compliance requirements that every partnership firm is expected to comply with in India.
1. Income Tax Return (ITR) Filing
Partnership firms must also file an income tax return just like individuals.
2. Tax Audit (If Applicable)
If your firm’s revenue crosses certain limits, you must have your accounts audited by a Chartered Accountant.
Threshold Limit:
- Revenue exceeding ₹1 crore (for business) or ₹50 lakh (for profession).
- This can be increased to ₹10 crore simply if the amount of cash transactions is minimal (as per Income Tax norms).
3. Maintenance of Books of Accounts
Although small firms might not maintain detailed accounts, it is a good habit to constantly upkeep your accounts.
Mandatory When: Turnover is greater than ₹25 lakh for professionals or ₹1 crore for business.
Records to be Maintained: Cash book, ledger, sales and purchase register, bills/vouchers, details of expenses.
4. TDS (Tax Deducted at Source) Related Compliance
If your partnership firm deducts TDS from loss of service and employs TDS on payments made to different parties for things like rent, professional fee, or salary, you must then do the following:
- Deduct TDS at the prescribed rates.
- Deposit the TDS to the government in due time.
- File quarterly TDS returns (Form 24Q/26Q as may be applicable).
- Issue TDS Certificates in respect of the TDS deducted to the relevant receiving parties.
You should understand that TDS has a penalty for non-compliance that can amount to heavy penalties.
Applicability: All partnership firms, both registered and unregistered, must file ITR.
Form: The form to be used for a partnership firm is IRT-5.
Tax Rate - A firm is taxed at a flat rate of 30%, plus surcharge and cess if applicable.
5. GST Compliance (If Registered)
If you have registered your firm under GST, yearly compliance is an additional burden:
Monthly/Quarterly GST Returns: GSTR-1 and GSTR-3B need to be filed on a regular basis.
Annual Return: GSTR-9 must be filed only if the annual turnover exceeds the minimum threshold.
GST Audit: Is applicable, if the annual turnover exceeds ₹5 crore.
6. ROC Compliance (If Registered under the LLP Act)
Partnership firms that changed the business structure to LLP, need to do the necessary filings with the Registrar of companies (ROC) by way of its annual return and receiving a copy of the mills statement of accounts. The annual return is required to be filed by LLPs, which is void for other firm types.
7. Income Tax Returns of Partners
While the firm files ITR-5, individual partners also need to file their personal Income Tax returns and must declare the income: salary, interest, and share of profit received from the firm.
The profit share should be exempt from taxation, as the firm has paid tax on it.
However, as for the salary and interest paid to partners — these will be taxable in their hands.
Due Date:
31 July - Not subject to tax audit
31 October - Subject to tax audit
Finally, even if your firm does not make any profits during the year , you are required to show the operation of the partnership and file the ITR and have it certified by the partners.
What Happens If You Don’t Comply?
Practical Suggestions for Managing Compliance
Maintain Proper Books of Accounts all year: Don't wait until tax time.
- Utilize Accounting Programs: Programs like Tally, Zoho Books, or QuickBooks are extremely useful and account for compliance.
- Get help from a Tax Professional: A CA or compliance advisor can save you time and mistakes.
- Put reminders of upcoming deadlines in your calendar: Missing a due date is the number one reason penalties are levied.
- Keep All Invoices and Supporting Documents: In the event of scrutiny, invoices and documents provide evidence of expenses.
In conclusion
Annual compliance for a partnership firm may not be as burdensome as a company's compliance may be, but it is equally important. From compliance with filing an income tax personal return to the maintenance of books of accounts and GST and TDS compliance, every aspect of compliance assists your firm in finally running smoothly.
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