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    A Partnership Firm in India is governed by the Indian Partnership Act, 1932. It’s a popular business structure for two or more individuals who agree to share the profits of a business carried on by all or any of them acting for all. While less formal than a company or LLP, a partnership firm still has significant compliance requirements.

    A crucial aspect is that unlike an LLP or Company, a partnership firm generally does not have a separate legal entity from its partners (except for tax purposes). This means partners have unlimited liability for the firm’s debts and obligations.

    Partnership Deed

    • Registration (Optional): While registration of a partnership firm is not mandatory under the Indian Partnership Act, 1932, it is highly advisable. An unregistered firm cannot sue third parties or partners to enforce rights arising from the contract, nor can partners sue the firm or co-partners. Registration is done with the Registrar of Firms of the state where the firm’s principal place of business is located.
    • Partnership Deed: This is the most fundamental document. It’s a written agreement between partners that outlines the terms and conditions of the partnership, including:
      • Name and nature of the business.
      • Names and addresses of partners.
      • Capital contribution of each partner.
      • Profit and loss sharing ratio.
      • Salaries, commissions, or interest payable to partners (if any).
      • Drawings allowed to partners.
      • Rules for admission, retirement, or death of a partner.
      • Procedure for dispute resolution.
      • Dissolution of the firm.
      • Changes to the partnership deed (like addition/removal of partners, change in firm name or principal place of business) must be intimated to the Registrar of Firms within 90 days.

    Income Tax Compliance

    Partnership firms are treated as separate taxable entities for income tax purposes, distinct from their partners.

    • PAN Card: The partnership firm must obtain its own PAN (Permanent Account Number).
    • Income Tax Rate: A partnership firm is taxed at a flat rate of 30% on its taxable income.
      • Surcharge: 12% if total income exceeds ₹1 crore.
      • Health and Education Cess: 4% on the income tax + surcharge.
    • ITR Filing (Form ITR-5): Partnership firms are required to file their Income Tax Return in Form ITR-5.
      • Due Dates:
        • July 31st of the Assessment Year (if no tax audit is required).
        • October 31st of the Assessment Year (if a tax audit is required).
    • Advance Tax: If the estimated tax liability for the financial year exceeds ₹10,000, the firm must pay advance tax in four installments.
    • Tax Audit (Section 44AB): A tax audit is mandatory if:
      • Sales, turnover, or gross receipts exceed ₹1 crore in the financial year. This limit is extended to ₹10 crore if cash receipts and payments are limited to 5% of the total gross receipts/payments (effective from FY 2020-21).
      • For professional firms, if gross receipts exceed ₹50 lakhs in the financial year.
      • If the firm opts for the presumptive taxation scheme (Section 44AD or 44ADA) but declares lower profits than the prescribed percentage.
    • Books of Accounts: Maintaining proper books of accounts (including Balance Sheet, Profit & Loss Statement, Cash Flow Statement) is essential, especially if subject to tax audit or if the turnover exceeds ₹25 lakhs or income exceeds ₹2.5 lakhs in any of the three preceding financial years.
    • Partners’ Remuneration & Interest: Any salary, bonus, commission, remuneration, or interest on capital paid to partners is deductible from the firm’s income only if it’s authorized by the partnership deed and meets certain limits and conditions specified in the Income Tax Act. Such payments are taxed in the hands of the partners as “Profits and Gains of Business or Profession.”

    GST Compliance (Goods and Services Tax)

    GST Registration

    Mandatory

      • If the aggregate annual turnover of goods exceeds ₹40 lakhs (₹20 lakhs for special category states).
      • If the aggregate annual turnover of services exceeds ₹20 lakhs (₹10 lakhs for special category states).
      • If engaged in inter-state supply of goods or services (irrespective of turnover).
      • If engaged in e-commerce sales (irrespective of turnover).
      • If liable to deduct TDS or collect TCS under GST.

    Voluntary

    A partnership firm can opt for voluntary GST registration even if the turnover is below the threshold, to claim Input Tax Credit (ITC) or improve business credibility.

    GST Return Filing

    If registered under GST, regular returns must be filed:

      • GSTR-1: Details of outward supplies (sales). Filed monthly or quarterly.
      • GSTR-3B: Summary return for tax payment and ITC claims. Filed monthly or quarterly.
      • GSTR-9 (Annual Return): Mandatory for businesses with an aggregate annual turnover exceeding ₹2 crore.
    • GST Invoicing, E-Invoicing, E-Way Bills: All applicable GST provisions related to invoicing and movement of goods must be followed.

    TDS (Tax Deducted at Source) Compliance

    • TAN (Tax Deduction and Collection Account Number)

    •  Mandatory for deducting and depositing TDS.

    TDS Deduction 

    The partnership firm is required to deduct TDS from various payments it makes, if they exceed prescribed thresholds, such as:

    • Salaries paid to employees (if taxable).
    • Rent, professional fees, commission, interest, contract payments, etc.

    • New from April 1, 2025 (FY 2025-26): Section 194T 

    • has been introduced, requiring partnership firms to deduct TDS at 10% on payments (remuneration, interest, commission, bonus) made to partners if the aggregate of such payments exceeds ₹20,000 in a financial year.

    • TDS Deposit

    •  Deposit the deducted TDS with the government by the 7th of the following month (30th April for March deductions).

    • TDS Return Filing

    • File quarterly TDS returns (Form 24Q, 26Q, 27Q).

    • TDS Certificates

    • Issue TDS certificates (Form 16, 16A) to deductees.

    Professional Tax Compliance (State-Specific)

    Applicability 

    Levied by certain state governments.

    Registration 

    The partnership firm will need to register for Professional Tax as an employer (for its employees) and also as a “person carrying on a profession or trade” (for the firm itself), if applicable in that state.

    Varies by State

    Rules, rates, and due dates are specific to each state.

    Payment & Returns 

    Deduct PT from employee salaries (if applicable) and remit it, and also pay PT on the firm’s profession/trade, filing periodic returns as per state rules.

    Labor Law Compliance (If you have Employees)

    If the partnership firm employs staff, various labor laws become applicable based on the number of employees.

    Shops and Establishments Act (State-Specific)

    Mandatory registration and compliance related to working hours, holidays, leave, wages, etc.

    Employees’ Provident Fund (EPF) Compliance

      • Applicability: Mandatory if 20 or more persons are employed.
      • Registration: With EPFO.
      • Monthly Contributions & ECR Filing: By the 15th of the following month.

    Employees’ State Insurance (ESI) Compliance

      • Applicability: Mandatory if 10 or more persons are employed (in most states) and the employee’s wage is up to ₹21,000 per month.
      • Registration: With ESIC.
      • Monthly Contributions: By the 15th of the following month.
      • Half-Yearly Return: By May 12th and November 11th.

    New Labour Codes

    Businesses need to stay updated on the implementation of the new Labour Codes (Code on Wages, Social Security, Industrial Relations, OSH Code) which will consolidate and replace many existing labour laws.

    Payment of Wages Act, Minimum Wages Act, Payment of Gratuity Act, Maternity Benefit Act, POSH Act (Sexual Harassment) 

    These acts may also apply depending on the number of employees and nature of the business.

    Business-Specific Licenses and Registrations

    Compliance here depends entirely on the nature of your business.

    • FSSAI License/Registration: For food businesses.
    • Import Export Code (IEC): For import/export activities.
    • Drug License: For pharmaceutical businesses.
    • Trade License: From local municipal authorities.
    • Udyam (MSME) Registration: Optional but highly recommended for benefits.

    Accounting and Record Keeping

    • Maintain comprehensive and accurate books of accounts, including ledgers, journals, bank statements, invoices, receipts, and expense vouchers.
    • This is crucial for tax filings, internal management, and potential audits.
    • Retain records for at least 6-8 years as per income tax regulations.

    Other Compliances

    MSME Dues

    If registered as MSME, timely payment to MSME suppliers is crucial (within 45 days, else interest is payable).

    Secretarial Compliances (for Registered Firms)

    While minimal compared to companies, any changes in the firm’s name, address, or partners need to be intimated to the Registrar of Firms.

    Partnership Deed Amendments 

    Any changes to the terms of the partnership must be formalized through an amendment to the partnership deed and potentially intimated to the Registrar.

    Consequences of Non-Compliance

    • Financial Penalties: Late fees, interest on delayed payments, and hefty fines.
    • Legal Action: Prosecution, lawsuits, and disputes.
    • Loss of Benefits: Inability to claim Input Tax Credit, deduct expenses, or avail government schemes.
    • Reputational Damage: Loss of credibility with customers, suppliers, and financial institutions.
    • Business Disruption: Suspension of licenses, bank account freezes.
    • Unlimited Liability: Partners’ personal assets are at risk for the firm’s liabilities in case of non-compliance.

    Get help for partnership firms from our tax experts for ensure timely and accurate compliance with all applicable laws and regulations.

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