How Can Small Businesses Pay Income Tax

Tax compliance is of utmost importance when operating a business in India. This makes it highly important for business owners to stay informed about tax regulations and seek professional advice when required to seamlessly navigate the tax landscape and optimize tax positions. Filing income tax returns for a small business in India involves several steps.

Here's a general guide to help you with the process:

Determine the applicable form
Gather necessary documents
Compute total income
Compute taxable income
Prepare and file the income tax return
Verify the return
File the return
Preserve documents
Understand the applicable form

The Income Tax department provides 7 types of forms such as ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, and ITR-7. Talking about small businesses in India, they file their income tax returns using the ITR-3 or ITR-4 form, which is primarily based on structure of the business and varied income sources.

ITR-3 is the form is to be used by an individual or a Hindu Undivided Family (HUF) who is having income under the head “profits or gains of business or profession" and who is not eligible to file Form ITR‐1, ITR‐2 or ITR‐4. Contrary to this, ITR – 4 is for individuals, HUFs, and partnerships with presumptive income from business or profession.

Collect necessary documents

While filing the ITR, keep all the required necessary documents by Business’s income statements
Balance sheets
Profit and loss statements
Bank statements
TDS certificates
Other relevant supporting documents

Calculate total income

Add all your income sources, including business income, salary (if applicable), interest income, rental income, and any other income.

Calculate taxable income

Deduct eligible expenses and deductions from your total income to compute the taxable income. These deductions could include business expenses, depreciation, rent, employee salaries, and other allowed deductions.

Pay any outstanding taxes

Make sure to clear any tax dues before filing your income tax return. This will help you to prevent interest and penalties.

Prepare and file the income tax return

As per your business structure and income sources, use the applicable ITR form (ITR-3 or ITR-4) to fill out your income tax return. Provide accurate details of your income, deductions, and taxes paid. We recommend you to always double-check the data before filing to avoid errors.

Verify the return

Once you have filed the return, verify it using one of the available methods, such as e-verification through Aadhaar OTP, net banking facility (for this, you should have an active net banking facility on your bank account), or sending a signed physical copy to the Centralized Processing Center (CPC). Please note that it is mandatory to verify the return to complete the return filing process. In fact, your authorised signatory or representative assessee too can e-verify your return on your behalf.

File the return

Submit your verified income tax return electronically through the Income Tax Department's e-filing website (https://www.incometaxindiaefiling.gov.in/). You can also file offline by mailing the physical return to the CPC.

Save documents

Always maintain copies of all filed returns, acknowledgment receipts, and supporting documents for at least six years from the end of the relevant assessment year. These records may be needed for future references or in case of any tax audits.

Please note that the tax laws and filing procedures may change over a period of time, so we strongly recommend to stay in sync with the latest guidelines from the IT department or you may seek assistance from a qualified tax professional.

Some more tips that will be very handy for businesses for tax help:

Always keep proper records

Keeping organized financial records is lifeblood for small businesses in India. It is very important in scenarios of tax audits. Always ensure to maintain records of income, expenses, invoices, acknowledgement receipts, and other relevant financial transactions.

Choose the right business structure

Opt for the appropriate business structure (e.g., sole proprietorship, partnership, LLP, private limited company). Each structure attracts different tax implications. Therefore, consider consulting a tax advisor to narrow down on the most tax-efficient option for your business.

Understand GST

GST is an acronym that stands for Goods and Services Tax. It is a value added tax levied on most goods and services when these items are sold to the consumer. If your business is eligible for GST, ensure that you comply with the GST registration and filing requirements. Familiarize yourself with the GST rates and the procedures for filing GST returns.
For a better understanding, read this: Income tax is considered as a direct tax paid on the income earned by people and businesses, while GST (products and Services Tax) is an indirect tax that is imposed on providing products and services.
Many businesses wonder if they can claim GST while paying income tax. Well, if your business is not registered under GST, you can claim CGST, SGST and IGST paid on expenditures as a relevant business expense. Contrary to this, if you’re a registered GST, you can claim the credit of Input GST paid on expenditures against the Output GST collected on sales.

Deduct eligible expenses

Our income tax laws allow different deductions on business expenses. Ensure that you claim all eligible deductions, such as rent, utilities, employee salaries, depreciation, etc, to reduce your taxable income.

Comply with TDS regulations

If your business makes payments to vendors or contractors, you may be required to deduct Tax Deducted at Source (TDS) and remit it to the government. Ensure timely and accurate TDS deductions and filings to avoid fines.

Do not mix business and personal accounts

It's crucial to always have a line of differentiation between business bank accounts and personal finances. It will simplify tracking income, business expenses and pave the way for easy tax filing.

Plan for advance tax payments

Small businesses in India may be subject to advance tax payments if their tax liability for the financial year exceeds a specified limit. Plan for these payments to avoid interest and penalties.

File tax returns on time

Adhere to the deadlines for filing income tax returns and other tax-related forms. Late filing can attract penalties and interest.