Tax Planning for New business-
Before starting a new business, business organization should think about tax provisions and tax incentives from income tax point of view.
Form of Organization:-
The first step to set up a new business is to decide the form of organization, selection of form of organization depends not only financial requirement and resources but also on tax considerations. A new business can be in any of the following forms:-
- Sole proprietorship:- Under sole proprietorship, the person who do the business is liable to pay tax, if any, entire income along with other income assesses in the hands of same person. No allowance and relief would be available in computing income from business and does not get deduction of remuneration for rendering of services by him. The cost of doing such type of business is small and all the profit from business goes to proprietor. As far as deduction in concerned, sole proprietor is entitled to get deductions under chapter VIA.
- Hindu Undivided Family:- Hindu undivided family’s income is firstly taxable in the hands of family at the rates applicable. After division of income of family among the members, the members of the family would not become liable to tax when they receive any portion of the family’s income as specific exemption granted under section 10(2) of the Income-tax Act, 1961.
Note:-As per section 115BAC, individuals and HUF have an option to pay tax in respect of their total
income (other than income chargeable to tax at special rates).
3. Partnership/LLP:- 30% flat rate is applicable on Firm/LLP, in addition to tax, surcharge would be applicable if the total income exceeds the threshold limit and health and education cess as well. Income of partners received from firm is exempt under section 10(2A).
4. Company:- Company organizes as widely held or closely held company on the basis of ownership and control.
Deemed dividend under section 2(22)(e) and the provisions of section 79 (restriction on carry forward of losses) do not apply to a widely held company. MAT provisions are applicable to companies. As far as tax is concerned, tax incentives available to domestic companies not available to foreign companies.
Advice for readers: for detailed study please refer any Direct Tax Laws’ book