Income Tax for Pensioners

Income Tax for Pensioners

For the purposes of taxation, pension payments are treated as salary income in return forms in India. The dictionary defines a pension as an amount paid at regular intervals by the State or a past employer on account of services previously rendered, age, disability, poverty or other uncontrollable loss suffered. Similar definitions obtain in Section 60 of the Civil Procedure Code and Section 11 of the Pension Act. Pension payments end only upon the death of the retiree.

Pensions in India

Those who serve the formal part of the non-government sector address their pension requirements by legally enforceable pension plans based on schemes of the Employees Provident Fund Organisation. Employers may decide to opt out of these and form Exempted Funds or Superannuation Funds for those employees who choose to decide in favour. Self-employed professionals and blue-collar workers in both organized and unorganized sectors may choose to adopt other voluntary pension schemes.

Difference between Commuted and Uncommuted Pension

Pension is often paid on a monthly basis but it can also be commuted, ie, paid as a single consolidated sum. This consolidated sum may be any percentage of your monthly payment. In such a case, your commuted sum would be calculated and your regular pension would be reduced by an equated monthly amount for as long as your commuted sum remains unrepaid.

Regularly paid pension is taxed in the same manner as regular income.

Commuted pension for a government retiree is fully exempt from income tax payment while it is only partly exempt for others.

Plan your taxes with a professional.

Income Tax Exemptions and Deductions for Pensioners

  • For a private sector employee, income tax rules state that where gratuity is also received by the retiree, the exempted income is one third of the amount of pension that would have been received assuming 100% of the pension was commuted. If gratuity is not a part of retirement benefits alongside pension then only one half of the pension that would have been receivable had 100% of the pension been commuted would be exempt from income tax.
  • Commuted family pensions are not taxed by the authorities. But the part that is given out in monthly or periodic instalments would be exempt by Rupees 15000 or one third of the amount received depending on which one is lesser.
  • UN employee families that receive family pension are not obliged to pay any income tax on that amount.
  • Family pensions received by relatives of armed forces personnel are also exempt from income tax.

 

Rates of income-tax for Senior Citizens between 60 and 80 years
1 where the total income does not exceed Rs. 3,00,000 Nil
2 where the total income exceeds Rs. 3,00,000 but does not exceed Rs. 5,00,000 5%
3 where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000 20%
4 where the total income exceeds Rs. 10,00,000 30%

 

Rates of income-tax for Senior Citizens between 60 and 80 years
1 where the total income does not exceed Rs. 3,00,000 Nil
2 where the total income exceeds Rs. 3,00,000 but does not exceed Rs. 5,00,000 Nil
3 where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000 20%
4 where the total income exceeds Rs. 10,00,000 30%

 

Deductions:

  • Section 89 of the Income Tax Act, 1961 provides relief to family pension beneficiaries who receive a commuted sum. If the commuted sum inflates the income tax rate for the assessment year, the Assessing Officer is bound upon receiving an application in this regard, to grant exemptions as above. Reference may be made, in such a situation, to Rule 21A and 21AA and the use of Form 10E for furnishing particulars.
  • Income tax deductions applicable to pensioners are the same as those for other categories of taxpayers. Click here to find out which ITR form needs to be filed for the purposes of filing tax returns.

Upon receipt and assessment by tax authorities you may obtain income tax refunds for if deductions and exemptions have been properly mentioned. CA assisted tax return efilings the best fit for you if you possess multiple sources of income.

Impact of GST on Digital Marketing

Impact of GST on Digital Marketing

Digital Marketing is the new revolution sweeping the globe and national and multinational companies alike are taking full advantage of the same. Digital Marketing has become an integral part of economies around the world and Indian Economy is no exception. Indian Economy is caught in the eye of a storm with GST and it will have a profound impact on the digital market economy as well.

GST is a huge step in the history of tax reforms to create confidence and an atmosphere of investment, manufacturing, and growth. GST is portrayed to provide the requisite impetus to the business sector and at the same time reducing the price burden due to regressive taxes on the consumers.

The most salient feature of the GST is that it would remove the multiple taxes levied on products both by the state and central government by virtue of taxes being in the concurrent list. GST seeks to replace these taxes which are primarily regressive in nature, due to which a cascading effect is created and as a result, the ordinary consumer pays around 20-30% extra. Another major problem with the previous tax regime was that there were constant disputes about whether certain items come in the category of goods or services and this would be addressed by GST as it explicitly provides a rate card to the same effect.

Digital Marketing and Advertising agencies fall under the services sector and would now be subjected to the Central GST, State GST and the Integrated GST which they will have to charge at 18% which was previously 15% as well as per the state/base of the client. However, previously digital marketing services were not eligible for input tax credit for the taxes paid, which now stands changed. The result

The result will, however, be an increase in the cost of digital marketing as well as the Google Tax Equalization Levy effective from 1st June 2017 will further add to it. This will also increase the cost of digital services in all.

This will go through the initial implementation turbulence which will cause static in the workings of small businesses more than MNCs who are expected to be covering all tracks.

Why GST is Getting Surat Terrified

Why GST is Getting Surat Terrified

Starting the 27th of June, the MSMEs belonging to the Textile Industry in Surat have been in a state of shock! They quickly tried to figure out what hit them — got scared to no end doing so — took to the streets, processions, dharnas, fasts — even withstood a Lathi Charge — all within a week! GST surely is Getting Surat Terrified!

To understand why this is so, we need to first understand a bit about Surat.

Surat is the polyester capital of India. Whether you shop at retail stores or buy a Saree, Salwar Suit or a Kurti through one of the daily deals on Amazon, chances are that it has a link back to Surat.

Migrants

The Surat textile industry is full of migrants — people from all over the country (other cities, more from small towns and villages) have migrated to the city to serve their native market. Over the years this additional demand resulted in the growth of the entire sector — and a few of these migrant units grew to a large scale. Most, however, stayed small. The barrier to entry was and is zero causing a continuous influx of migrants from all over the country. Anyone from a small village could come

Anyone from a small village could come into Surat, take a small 160sq ft shop on rent (basic reference of someone from his native already settled here) to start his business operation within a day! Ease of doing business was at all time high here!

The Textile Value Chain

Surat has thousands of weavers — (those who convert yarn to fabric). Around 450 process houses (engaged in printing and dying of fabric). Thousands of embroidery units, stitching units and lakhs of people employed in the checking, packing, cutting, transportation — and thousands of agents, arhatias, brokers, commission agents aiding each step.

The key about the Surat value chain is that it lacks Integrated units — not that they don’t exist — but that they are the exception. GST is a boon for the Integrated players and they are not complaining at all! The norm in Surat, however, is for the migrant trader to buy greige from the weaver, send it for processing to a process house, send it to an embroidery unit, then send it to value addition multiple times before the product is ready to be packed and sold to his native market.

It is worth noting that the value chain is a buyer’s market all the way. Oversupply at each step is the norm. (Reason? Zero barriers to entry at the migrant trader level, and it’s these traders who’ve “graduated” to other parts of the value chain — often to escape competition at their previous link).

Given the above, it is easy to see that these migrant traders drive the value chain. They place the orders at the Weaver, the mills process their orders, and so on in other parts of the chain. These migrant traders started with zero or very little “books capital”. The taxation and the attitude towards taxation ensured that even when they made money, their books capital stayed low — and a parallel economy bloomed! The nature of the value addition required (lace stitching, diamond sticking, handwork etc) and the kind of people executing them (often housewives at their homes) meant that there were lots of avenues to deploy the cash capital. The fact that nothing except income tax was applicable effectively meant that book-keeping was an annual exercise — reserved to be driven by the CA!

Competition, however, is another story. The zero barrier to entry meant more and more competition. This created a large section of migrant-traders who stayed small — and cut corners everywhere to survive! Tax evasion was just one example of such “cost-cutting”.

Goods so produced are typically sold via agents in the native market. The buyer downstream is just as disorganized. Returns are high. Often goods are sent to the agent on a consignment basis. Unsold. To be sold — and invoices created after the agent informs who he sold the goods to and at what rate/discount — sometimes as late as 60 days after dispatch! The high competition also means that even a small migrant-trader deals with multiple agents and keeps switching agents even for the same customer!

Enter GST

With the introduction of GST, the entire value chain breaks down — and will need to re-organize in a big way!

Inverted Duty Structure

The weavers buy yarn with 18% GST, sell fabric with 5% GST. This renders them totally uncompetitive against an integrated player who will be able to sell fabric almost at the cost of the yarn used. (100 Yarn + 20 Conversion + 6 GST = 126 for Integrated, 100 + 18 (GST) + 20 + 7(GST) = 145 for weaver). No ITC Cash refund system for the textile sector ensures that he will not be able to benefit from the yarn GST credit lying with him! There are thousands of weavers facing this!

Cheaper Imports

Imports have become cheaper: Post GST, you can import fabric @ 15%. Earlier it was @27–29%. This is another nail for the weaver! Not only has GST rendered him uncompetitive against local integrated players, it has taken away the protection that the government provided via import duty!

The migrant traders owing to his scale buys from the local weavers. His costs are bound to rise rendering him uncompetitive.

Reporting and Compliance

All transactions need to be reported. Purchases need to be reconciled with the supplier on a monthly basis. This will mean that even even the smallest of traders will need to invest in a full time accountant and be far more organized. The issue may appear frivolous. After all, who runs a business and not even invest in keeping books properly? Welcome to Surat! For the large section of small migrant-traders of Surat, this change itself requires a change in mindset and a recurring expense that they would rather not do!

Cash Capital

Transaction-level reporting as mandated by the GST will mean that the booming parallel economy will collapse! Cash Capital that the trader generated over decades can no longer be deployed in his business. The thriving parallel economy was a tool to cut costs will collapse! GST almost forces that you buy from organized players, and this will, in the Surat’s textile sector, mean that the cost of purchase for these migrant-traders will go up! Bank loans will increase — servicing them will be an additional cost for the trader.

Other Operational Issues

The thousands of housewives working from home stitching laces, sticking diamonds could lose their jobs — lest someone amongst them organizes them into a GST compliant outfit. Even when that happens the costs of the chain increases!

Sales in other states via agents — when goods are sent unsold and later sold by the agent, as per the GST Law, requires registration in each state! This means more compliance, more costs!

No Input Tax Credit Refund to the textile sector — effectively meaning that each and every item is now 5% more expensive!

Fear Factor

Provisions of jail term, audits, inspectors — those mentioned in the GST Law have only served to escalate the fear in the minds of the Surti Trader! The trader has till now been exempt from all taxes (except income tax) — 99.9% are not even covered under ESIC, PF or any other such tax/levy/fee. Fear of being harassed at the hands of the inspector in the GST regime drives them to revolt!

In summary, the traders and weavers, the ones who are up in arms — fear being rendered uncompetitive & jobless, they fear being harassed by the inspectors and getting sucked into a bribe culture (which is non-existent currently!) — it is really a question of survival for many and therefore GST is Getting Surat Terrified!

GST's Role in Pushing Investments in the Real Estate Sector

GST’s Role in Pushing Investments in the Real Estate Sector

The Goods and Services Tax (GST) is one of the largest indirect tax reforms in the country anticipated to not only simplify the complex tax structure but would also boost consumer demand in the prevailing timid realty market.

The GST will be effective beginning 1 st July 2017, and with any new reform, there are some areas where further clarity is required. As people start implementing the tax regime, there will be queries that need further clarification. It is natural for people and businesses to feel overwhelmed when implementing a new reform.

It has been slated that under construction properties or residential construction services, will be subject to a 12 percent GST rate for developers selling residential units prior to the completion of construction to home buyers. Stamp duty will be levied in addition to GST on these transactions. Currently, with the exception of stamp duty, buyers need to pay several indirect taxes such as excise duty, value-added tax and service tax.

In a recent financial analysis, it was estimated that the current real estate transaction taxes are:

15.2% for Bangalore = 4% VAT, 4.5% Service Tax, 5.7% Stamp Duty, 1% Registration

11.5% for Mumbai = 1% VAT, 4.5% Service Tax, 5% Stamp Duty (recently reduced), 1% Registration Charges

11.5% for Pune = 1% VAT, 4.5% Service Tax, 5% Stamp Duty, 1% Registration Charges

14.5% for Chennai = 2% VAT, 4.5% Service Tax, 7% Stamp Duty, 1% Registration Charges

15% for Gurgaon= 4% VAT, 4.5% Service Tax, 6% Stamp Duty, 0.5% Registration Charges

Furthermore, real estate builders will now receive the benefit of input credits on materials such as steel, cement, sand, which will be deducted from tax liabilities. It has been anticipated by the government that builders will transfer these benefits onto the end consumer by way of price reduction/installments with a view to boost consumer demand in a tepid sales environment. The government in a recent statement has alluded to using ‘anti-profiteering’ rules in line with the Directorate General of Safeguards (DGS) stipulations, as a deterrent to ensure builders transfer these benefits to the end consumer. It is, however, in the interest of the sector as a whole to maximise consumer demand and encourage purchase activity.

GST of 18 percent tax will be applicable for leasing commercial properties. Experts have clarified that the threshold limit for the applicability of GST has been increased from Rs 10 lakhs to Rs 20 lakhs. Hence, some of the landlords that came within the purview of the service tax regime, may not be included under the tax net of the GST.

GST is slated to be applicable on financial services at an 18% rate. Hence, loan processing charges are expected to increase in the GST regime.

The affordable housing segment has been currently exempted from service tax and hence a clarification is expected on GST for affordable housing. Additional clarifications are also required with respect to abatements and composition schemes.

The introduction of RERA, the GST, REITs, Benami Transaction (Prohibition) Act and other government initiatives such as demonetisation, contribute to enhancing transparency and accountability across the sector. For the NRI market, it is anticipated that with the easing of purchase norms combined with these measures, there will much needed simplification to the transaction process which should contribute to increasing confidence in the sector. It is also important to remember that when buyers purchase properties, they focus on the value, their individual needs/requirements and potential appreciation of the asset, rather than on taxation slabs!

A uniform tax structure in markets such as Indonesia, Thailand, among others has been seen to be a catalyst to increase investment. With the introduction of input tax credits, there is now an incentive for added transparency at the construction stage, an area that has been of concern to investor’s previously. Limited visibility on transactions and questions around the credibility of companies across the sector has often been a reason for hesitance among investors, especially with respect to equity deals. A combination of these measures should in the long run help improve the perspective of investors and consumers towards the sector.

With the introduction of RERA and the GST, the real estate sector is metamorphosing into a transparent, tightly controlled and regulated industry. All these measures will, in the long run, create stable businesses, as well as contribute to reducing the trust deficit between the consumer, the investor and the developer. Hence, a simplification to the existing complex taxation systems should be welcomed positively as we get more structured as an industry and as an economy

Impact of GST on Daily Life

Impact of GST on Daily Life

July 1, 2017 is set to become a red-letter day in the history of India and the Indian economy. This is due to the fact that the taxation system of India, established post-independence, is set to see a radical change. Currently there is a plethora of indirect taxes which the GST aims to subsume with its implementation, thus imposing a single, comprehensive tax. This will also do away with the cascading effect of taxes on goods and services.

What is GST Bill in India

On 12 April 2017, the Central Government enacted four GST Bills:

  • Central GST (CGST)
  • Integrated GST (IGST)
  • Union Territory GST (UTGST)
  • Bill to Compensate States

These bills aim to change the current complex structure of multiple indirect taxes and replace it with a comprehensive Goods and Services Tax (GST). This will be implemented on July 1, 2017. The GST is expected to usher in a transparent and corruption free tax regime.

Key Benefits of GST (Anticipated)

  • Wider tax base, necessary for lowering the tax rates
  • Elimination of multiplicity of taxes and their cascading effects
  • Rationalisation of tax structure and simplification of compliance procedures
  • Reduction in duplication and compliance costs due to harmonisation of Centre and State tax administrations
  • Reduction of errors and increased efficiency with automation of compliance procedures
  • India will become a single market with a reduction in cost and time on movement of goods.
  • While the GST will make way for more tax revenues for government, it will lower the tax burden on industries.
  • There will be a marked reduction in paperwork and time involved in paying taxes.
  • Over time, GST is expected to add between 2 to 2.5% to the GDP.
  • Increase exports between 10 and 14%.

Impact of the GST on Services

To help understand the GST, we need to explore GST impact on common man. (Rates of select services only have been explored as an example)

  • Exempted Services: Education, healthcare, residential accommodation, hotels/ lodges with tariff below Rs. 1000 are exempt from the GST.
  • 5% GST: Goods transport, rail tickets (other than sleeper class), economy class air tickets and cab aggregators (like Uber and Ola) will come under the 5% tax slab in GST.
  • 12 – 18% GST: Work contracts, business class air travel, telecom services, financial services, restaurant services, and hotel/ Lodges with tariff between Rs. 1000 and 5000 will incur a 12 to 18% GST.
  • 28% GST: Get ready to pay GST of 28% for cinema tickets (above Rs. 100 while for tickets below Rs. 100, it will be reduced to 18%), betting, gambling and hotels/ Lodges with tariff above Rs. 5000.

How GST Will Affect Your Everyday Life

The Ministry of Finance has been keeping the masses informed about key issues pertaining to the GST. A tweet informed that daily consumer goods will be exempted from taxes under Goods and Service Tax, making them cheaper by 4 to 5%. “Daily Consumer goods being used by the common man among others to become cheaper after GST,” read a tweet.

“On roll-out of GST wef July 1, 2017, there will be zero GST on food grains, flours, cereals, pulses, atta, maida & besan among others,” read another tweet by the Ministry, informing the people about daily needs and GST.

Along with these commodities, fresh vegetables and fruits, fresh milk, common salt, puffed rice, animal feed, organic manure and fire wood will also be put under the zero% tax slab. However, the same items, if branded with registered trademark will be taxed at 5% under GST.

Raw silk, wool or jute and hand operated agricultural equipments will also be taxed at zero%, thus ‘making these items cheaper for the common man.’

Changes in The Tax Levels by The GST Council

  • Cashew nuts: Reduced from 12% to 5%
  • Ready to Eat: Pickles, chutney, sauces, instant food mixes: Reduced to 12% from 18%
  • Kajal: Slashed from 28% to 18%
  • Insulin: Reduced to 5% from 12%
  • School bags: Reduced from 28% to 18%
  • Children’s colouring and drawing books: NIL (was 12%)
  • Cutlery: Reduced from 18% to 12%
  • Select tractor components: Will now attract 18% compared to 28% under previous arrangement
  • Computer printers: Reduced from 28% to 18%
  • Ayurveda: Increased to 12% from present 8 to 9%
  • Entertainment: Theme park visits and tickets to sporting events like IPL to be charged 28%

The GST Council is meeting at regular intervals to facilitate smooth implementation of the GST. Ten working groups have been set up to help key sectors and industries like banking, telecom, IT/ITES, financial, textile, oil and gas, gems and jewelry, transport and logistics, and small and medium enterprises work through the anticipated hiccups and transition to the GST.

The Impact of GST on Tourism in India

The Impact of GST on Tourism in India

Goods and Services Tax (GST) is touted as one of the biggest reforms of Modern India. GST has got some sectors of the Indian economy delighted, while some are disappointed while the rest are a bit confused about it. GST is expected to add almost 2% to India’s GDP. Spare me the calculation but hey! that is a huge amount! Let us see the Impact of GST on Indian tourism sector.

As a consumer of Tourism and hospitality services, a single tax-structured bill should save up to 10-15 percent on the overall bill. Entertainment, luxury, and other service taxes in the hospitality industry shall attract a rate of 18% as against the existing 20-27%.

The impact of GST on restaurants:

According to the National Restaurant Association of India’s 2013 India Food Service Report, the current size of the Indian food service industry is ₹2,47,680 crore and is projected to grow to ₹4,08,040 crore by 2018 at the rate of 11%.

Many lip smacking dishes in India could be cheaper after GST!

Gains to the restaurant sector:

  • Overall cost of procurement of raw materials will go down
  • Since most items used in the restaurant industry like food grains, milk, eggs, curd, common salt, unbranded besan, sugar, tea, edible oils etc. are either exempt from GST or are in the 5% GST bracket, the restaurant industry has a lot of positive takeaways.
  • Though the entire restaurant industry will benefit from GST, cloud kitchens and Food delivery businesses will be most benefited.
Food ingredients and GST- BnBNation
Most Food ingredients are either exempted or at a low level of GST rate.

As Shitiz Dogra, co-founder of Firsteat.in puts it, “With slightly lower procurement costs GST will make it easy for the restaurants to take credit of input goods and services consumed while providing restaurant services.”

Understandably, the cloud kitchens and Food delivery services are the happiest about GST and the high-end AC restaurants are a bit somber due to high tax rate!

The impact of GST on Accommodations in India

Impact of GST on Hotels- BnBNation
Impact of GST on Hotels

Accommodation forms a major part of a traveler’s journey. Earlier, Hotel owners were tense as room worth INR 5000 a night would have taxed at 28% but now the rooms above INR 7500 will be taxed at 28%. The tax slab shows that travelers should prefer budget rooms that cost less than INR 1000 per night.

However, I am wary if they would be the right choice for a traveler after a long flight! Especially, if situated in a shady area of a city, such a hotel room might just ruin the traveler’s experience!

The impact of GST on Bed and Breakfast accommodations

Most of the BnB owners offer Breakfast (unless the traveler is really on a tight budget) to the travelers. They handpick the source of the ingredients by ensuring that they are safe and economical. Thus, the cost of BnB rooms will be either same or lesser. Apart from that, since BnB’s do not have to pay the luxury tax or service tax up to a certain limit, they are charged water and electricity tariffs at domestic rates, unlike hotels. So when you are coming to India, you could seriously consider staying in an Indian home with an Indian family!

Conclusion:

Though there has been chaos in the Indian economy due to GST. Don’t we crib about the rising corruption in India by referring to a low rank in World Bank’s Ease of Doing Business report. In my opinion, GST is a step in the right direction!

India has a higher rate of taxes than the neighboring South East Asian countries. However, GST will still lower the previous tax rate and may need revising them again in the near future. I think we should all welcome it and make it a part of our lives.

PS. I would recommend you consult your CA and clarify your doubts on the GST rate. Shoot your queries through to @askGST_GoI (Official Twitter handle of Government for queries on GST) through your twitter handle.

Partnership Firm

Suitability Analysis Of Partnership Firm (UPDATED FEB 2017)

Partnership firms and sole proprietorship forms of business entities are popular in India. Partners who have entered an agreement to carry out a business are collectively called Partnership Firm. The name under which the business operations are carried out is termed as the “firm name”.

The partnership firm comes into existence by the execution of a partnership deed. A partnership deed can be oral or written. It can either be registered with registrar of firms or not as per the discretion of majority of partners in the partnership firm. For tax purposes though, a written partnership agreement is mandatory. Also, registering the partnership firm offers benefits which will not be available otherwise. Templates of partnership deeds are available for download here.

Key elements of Partnership Firm’s existence

Below is a list of elements which are the very essence of partnership firm.

Partnership deed

A contract is the very foundation for a partnership firm. Unlike a HUF which arises out of Status and relationship, the partnership firm arises out of contract. Concept of inheritance of partnership does not exist. If any member of partnership passes away, the legal heir can only make a claim on the assets of the member. The legal heir cannot lay claims for partnership in the form, unless he enters a separate contract with the other partners. For more on the partnership deed, download this form here.

Minimum and Maximum Partners

The Indian Parternship Act 1932 which governs partnership firms mentions that 2 members are required to form a partnership. This is the minimum number; it does not mention any maximum number. However, the companies Act clearly mentions that any partnership firm should not exceed 20 partners. It specifies that any firm conducting banking business, having more than 10 partners and any other business (partnership firm) with more than 20 partners is considered illegal.

 Conducting business and intent to make profits

The partnership firm has to be formed with a view to carry out some business. It can be trade, service, manufacturing or anything else. It has to have a profit making motive. A charitable organisation cannot be registered under partnership firm. The intent to make money out of the business operation is essential.

Profit Sharing

The partnership deed has to specify the ratio in which the profits will be shared. It can be in any ratio, if there is no ratio specified than it is divided equally. There need not be any restrictions on how the losses will be shared. It can be borne by a single partner as well.

The partnership deed (available for download here) should expressly specify the ratio in which the profits / losses will be shared. Else, the Indian Partnership Act 1932 specifies that it shall be distributed evenly. Unless, the partnership firm is registered as a Limited liability partnership (LLP), the liability of the partners in the firm will be unlimited.

Benefits of Partnership Firm

  • Easy Setup: The process to register a partnership firm is fairly simple and hassle free.
  • Operational Flexibility: Due to the limited number of people, the operations of business can be altered as per requirement. In consultation with the partners, the changes can be implemented, there need not be any written documentation of changes so included.
  • Better control: Since the members are lesser, they hold better control over the operations and the quality. They also have better view of the fund’s movement. Operational efficiency and resource management is better than private limited and public limited companies. In fact, the management is better compared to sole proprietorship due to shared responsibilities.
  • Decision Making: The decision making is more effective, given that there are more minds put together. Each may have the same intent whilst forming the business partnership. However, on operational issues, they may bring in various views and expertise.

A partnership firm is best suited for services businesses that need operational flexibility and efficient resource management. For further information on the paperwork needed to sign a partnership, download the relevant forms here.

 

 

Private Limited Company

Understanding & Registering a Private Limited Company (UPDATED FEB 2017)

Most start-ups these days prefer to form a private limited company. This makes it easier for them to raise capital through angel funding and venture capitalists. They also offer employee stock options with a view to retain talent.

Banks and other financial institutions also find it comfortable to lend to private companies than to partnership firms and sole proprietorships. Without funding and talented employees, any company (especially in the services space) cannot expand.

Understanding Private limited company

This is a company which offers limited liability to its members. It also places certain restrictions on ownership. These restrictions are mentioned in the Indian companies Act, it is essential to prevent hostile takeover of business.

The restrictions as prescribed under the Companies Act are mentioned below –

  • Existing shareholders are not allowed to sell / transfer their shares to others without first offering the same to the rest of the shareholders for purchase
  • Shareholders are not allowed to offer their shares to public over the stock exchange without adequately notifying the authorities / exchange
  • Number of shareholders cannot exceed 50 members

Members of Private limited company

A private limited company should have a minimum of 2 members as directors and shareholders. It can have a maximum of 15 directors and 50 shareholders. The restriction placed on private limited companies is less compared to public limited companies.

In case private limited companies, there is no requirement to disclose the books of accounts to the public. This provides them ample flexibility to focus on long term growth. The number of shareholders is also minimal; hence, it is not as challenging to appease all of them.

Advantages of Private Limited Company

  • Members’ liability is limited: The members’ liability is to the extent of capital contributed during the formation of the private limited company. The personal property will not be included to settle debts in case of bankruptcy or liquidation of assets of the company.
  • Raising equity becomes easy: Most venture capitalist / strategic investors prefer to fund private limited companies. They have a clear demarcation of directors and shareholders. The liability of the members’ is also limited. Private companies have the ability to accommodate equity funding without much structural alterations.
  • Debt access: Banks and financial institutions more comfortable in lending to private limited companies. They also have the option of raising funds by issuing warrants, debentures and other debt instruments.

Documents needed for registration of private limited company

The directors and shareholders have to submit the below mentioned copies –

  • Copy of PAN card
  • Copy of passport (in case of foreign nationals / NRIs)
  • ID and Address Proof (in addition to PAN card)
  • Photo – passport size
  • Specimen Signature

For registration of office, below mentioned documents become necessary –

  • Copy of bank statement/ electricity / gas / telephone bill (latest)
  • Property deed (own property ) or Rental /Lease agreement copy (Notarised)
  • NoC from property owner

The registration of company can be done online, go here for further information. All the above documents have to be filed online. Physical presence is not required at all. If all the documents submitted are in order and depending on the workload of the registrar of companies. The company should be registered in less than 15 days.

The registration process is governed by Ministry of Corporate Affairs. The online registration process is an initiative which was launched as part of “Start-up India” campaign. There are few registration norms which are to be followed as part of the online registration – Digital Signature Certificate, Director Identity Number, E-form filing are mandatory while registering the private limited company. For more details on the process go here. And if you are missing any forms, you can download them here.