Partnership Firm Compliance

A partnership firm is required to file returns under the Income Tax Act, 1961. Partnership firms are liable to pay income tax at the rate of 30% of their total income. A partnership firm is also liable to pay an income tax surcharge of 12% if the total income exceeds Rs.1 crore.

Additional to the income tax and surcharge a partnership firm should also pay the education cess and the secondary higher education cess.

Education Cess is applied 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%.

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

While calculating the payable income tax an individual should check the available deductions on income:

• Remunerations or interest paid to the partners of the firm does not come 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 occur or were regarding anything that pre-dates the partnership deed.

Partnership firms’ income tax return should be filed in Form ITR-5. This form ITR-5 is used to partnership firm income tax returns and not for the tax returns for the partners.

Like all other income tax forms, ITR 5 is a non-attachment 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 present the same before the tax authorities when ever is requested.

ITR-5 can be filed online with the official portal of income tax department. One needs to submit the documents only when they are asked for. While filing the Partnership firm tax returns the partners must have class 2 digital signatures certificates for verification of the filing process. Also, online income tax return filing is mandatory for partnership firms if the needs to audit its accounts.

In case of manual filing, the assessee should print out two copies of Form ITR-V. One copy of ITR-V should be signed by the assessee and has to send by the post to at Address- Post Bag No. 1, Electronic City Office, Bengaluru–560100 (Karnataka). The other copy should be reserve by the assessee for his record.

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

• In case of business if total sales exceed Rs.1 crore in the previous year.

• In case of a profession if gross receipts in profession exceed Rs.50 lakh in any previous year.

• Besides, there are other conditions applicable that could result an audit mandatory for a partnership firm.

• If a partnership firm entered into international transactions or specified domestic transactions a report should be present in Form No. 3CEB under section 92E. For partnership firms required to submit Form 3CEB, the due date for filing a tax return is 30th November.

The due date for filing the return of partnership firm 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 has to audit its accounts then it has to file its income tax returns by 30th September.

The cost of compliance of partnership firms is less as compared to the companies. Unlike companies, partnerships need not to conduct meetings or maintain a register. Non - compliance can be costlier than meeting compliances.

After the tax paid by the firm, the partners are not required to pay any tax on the share of income earned from the firm.

Amount received as Interest or remuneration etc. by the partner will be treated as 'Business or Professional Income', excluding the amount disallowed from the ends 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 added for the benefit of the firm), in the form of income of the firm is not included in computing his total income i.e. his share in the total income of the firm should be exempt from tax under section 10(2A) of the Act.