In India, the taxation of a sole proprietorship is relatively simple and straight forward because the business is not considered a separate legal entity from its owner. The income from the sole proprietorship is taxed as the personal income of the proprietor i.e. Individual.
How Taxation of Proprietorship Works?
1. Income Tax
- Income Tax Filing: The income from the sole proprietorship is treated as the personal income of the proprietor and is reported in their individual income tax return (ITR). The proprietor files their return under ITR-3 (if the business is not a profession) or ITR-4 (if the business is under the presumptive taxation scheme).
- Taxable Income: The taxable income includes revenue from the business after deducting allowable business expenses such as rent, salaries, office supplies, and other legitimate business costs.
- Income Tax Slabs under Old scheme (for individual taxpayers under 60 years):
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
In addition, there is a health and education cess of 4% on the total tax payable.
- The individual may opt to pay tax under new scheme wherein concessional rate of tax is available however benefit of deductions under chapter VI-A such as 80C, 80D is not available.
2. Self-Employment Tax (Professional Tax):
In India, professional tax is levied by state governments, and the rate varies by state. It is typically a small amount (ranging from ₹200 to ₹2,500 annually) and is applicable to people engaged in professions or trades, including sole proprietors.
3. Presumptive Taxation Scheme (Section 44ADA/44AE)
Sole proprietors can opt for a simplified tax scheme under Section 44ADA or Section 44AE if they meet specific criteria:
- Section 44ADA:
- This scheme is for professionals (e.g., chartered accountants, doctors, lawyers, architects, etc.) with gross receipts of up to ₹75 lakh per year.
- Under this scheme, 50% of gross receipts is deemed to be the income, and no further expenses need to be calculated or claimed, simplifying the process significantly.
- The income will be taxed at the regular individual income tax rates based on applicable slabs.
- Section 44AE:
- This scheme is available for small businesses (such as those using goods vehicles) with a turnover of up to ₹3 crore.
- In this scheme, a fixed income is presumed based on the number of vehicles owned by the business, and the proprietor is taxed accordingly.
4. GST (Goods and Services Tax)
- If a sole proprietorship’s annual turnover exceeds ₹20 lakh in case of being service provider and threshold of Rs. 40 lacs in case of business (₹10 lakh for special category states), it needs to register under GST.
- The business must collect GST on the goods and services it sells and remit the tax to the government.
- GST rates depend on the nature of the goods and services, varies from 0% to 28%.
5. Allowable Deductions
Sole proprietors can deduct business-related expenses from their income, which will reduce the taxable income. Common deductions include:
-
- Rent
- Utilities (electricity, phone)
- Depreciation on business assets (vehicles, equipment, etc.)
- Salaries paid to employees
- Marketing and advertising costs
- Professional fees
6. Advance Tax
A sole proprietor is required to pay advance tax if the estimated tax liability for the year exceeds ₹10,000. Advance tax is paid in four instalments during the year:
-
- 15% by June 15
- 45% by September 15
- 75% by December 15
- 100% by March 15
7. Tax Audit
- If a sole proprietorship’s turnover exceeds ₹1 crore (₹75 lakh for profession under the presumptive taxation scheme), the business must undergo a tax audit under Section 44AB. The audit is subject to other specified limits.
- The audit is performed by a qualified chartered accountant to verify the financial statements and ensure compliance with tax laws under Income Tax Act, 1961.
8. Additional Taxes
Depending on the nature of the business, sole proprietors may be subject to other taxes like TDS (Tax Deducted at Source), capital gains tax on the sale of capital assets.
Conclusion
In India, taxation of a sole proprietorship is relatively simple but does depend on the nature of the business and its turnover. A sole proprietor will pay income tax on the net profits of the business as personal income, and can take advantage of the presumptive taxation scheme if eligible. GST registration, professional tax, and advance tax are other important aspects.
Taxcellent helps you in getting proprietorship registered along with obtaining PAN, TAN, GST and opening Current Account in Bank. We also assist in obtaining Trademark and MSME certificates. Taxcellent also assist you in filing GST returns and Income Tax Returns of Sole Proprietorship Firm Registration Delhi.