For small business owners, dealing with the complexities of income tax returns (ITR) filing can often seem daunting. With the constantly changing tax laws and multiple filing requirements, it's important to understand and manage tax obligations effectively to ensure the financial health and compliance of your small business.
Filing income tax returns is not just a legal responsibility. It also offers valuable insights into your business's financial status, enabling better financial planning and decision-making.
In this article, we'll break down the process of ITR filing for small businesses, including the various forms, deadlines, documentation requirements, and more.
Why should small businesses file ITR?
Filing ITR is more than an obligation for small businesses. Here are some other reasons why small business owners should diligently file their ITR:
#1 Report financial details
Filing ITR allows you to officially document your business’s financial activities for the fiscal year. This includes reporting income from various sources, along with expenses, profits, and losses. It's a transparent way to showcase your business’s financial health, not just to the tax authorities but also to potential investors or stakeholders.
#2 Carry forward losses
For small businesses, particularly startups, the first few years might not always be profitable. Filing ITR allows businesses to legally carry forward losses to subsequent years. This can be offset against future profits, reducing the taxable income in those profitable years.
#3 Apply for a loan
Taking a business loan is a secure and convenient way to scale your business operations without any financial burden. However, when applying for business loans, lenders often require your ITR receipts from the last 3 years as proof of income. Regularly filed ITRs reflect the financial stability and creditworthiness of your business. It reassures lenders about your ability to repay the loan, increasing your chances of approval.
#4 Avoid penalties
Filing an ITR is not just a good business practice but also a legal requirement. Failure to file tax returns can lead to penalties and legal consequences under Section 234F of the Income Tax Act. These might include fines or even prosecution in extreme cases. Filing your ITR on time helps avoid these penalties and ensures compliance with the tax laws, thus avoiding unnecessary legal hassles and financial burdens.
Choosing the right ITR form for small businesses
There are different ITR forms for small businesses depending on the nature of the business and the type of income.
ITR form
Eligibility
ITR-3
Small business owners or sole proprietors earning income from business or profession.
ITR-4 (SUGAM)
Small businesses other than LLP who have opted for a presumptive taxation scheme and have a gross annual revenue of up to Rs. 50 lakhs. Their income is calculated under Sections 44AD, 44ADA, and 44AE of the IT Act.
ITR-5
LLPs and partnerships that don't file ITR 7.
ITR-6
Businesses that don't claim exemption under Section 11.
ITR-7
Businesses that file returns under sections 139(4A), 139(4B), 139(4C), or 139(4D).
Documents required for ITR filing for small businesses
Here’s a comprehensive list of documents that small business owners need to file their tax returns:
Personal details:
-PAN card
-Aadhar card
-Bank account details
Income proof
-Income from house property: Relevant documents for rental income, home loan, etc.
-Income from business or profession: Balance sheets, P&L statements, and other financial statements.
-Income from investment: Statements for savings accounts, FDs, or other investments.
-Income from capital gains: Proof of gain or loss from the sale of property, mutual funds, shares, etc.
-Income from other sources: Documents for dividends, interest income, etc.
Bank statements and financial documents
-Statements for savings accounts, current accounts, and FDs.
-Form 16A
-Form 26AS
Steps for e-filing ITR for small proprietorship business
Follow these steps for online ITR filing for small businesses:
Step 1: Visit the official website of the income tax department to file your ITR.
Step 2: Log in using your PAN, password, and captcha code, or register your business if you are a first-time user.
Step 3: Under the 'e-file' menu, select 'Income Tax Return.'
Step 4: Your PAN will be filled automatically. All you need to do is fill in the following details:
-Assessment year
-ITR Form Number
-Filing type as "Original/Revised Return"
-Submission mode as "Prepare and Submit Online"
Step 5: Click on 'Continue.'
Step 6: Read all the instructions and fill up the ITR-4 form. Make sure to click on "Save Draft" periodically to save your progress as a draft.
Step 7: Select a verification method per your preference.
Step 8: Click on 'Preview and Submit.'
Step 9: Verify all the details.
Step 10: Submit the ITR.
Consequences of not filing small business income tax return on time
Filing the Income Tax Return within the given deadline is crucial for small businesses. Failing to do so can lead to several consequences like:
#1 Penalty for late filing
The most immediate consequence is the penalty for late filing. Under Section 234F of the Income Tax Act, you'll be fined if you file your returns after the due date. The amount of the penalty depends on the date of filing and the total income. The longer you delay, the higher will be the penalty.
#2 Interest on unpaid tax
Failing to file the ITR on time results in an interest charge under Section 234A. The interest is calculated from the due date of filing to the actual date of filing.
#3 Carry forward of losses
Small businesses have the provision of carrying forward losses to offset future profits. However, if you don't file your ITR on time, you lose the opportunity to carry forward business losses.
#4 Difficulty in obtaining loans
Banks and financial institutions typically require the last three years of ITRs when applying for a loan. If you don't file your taxes on time, it can make it harder to get a loan for business expansion or other needs.
Scale your business with Tata Capital
Filing ITR on time not only ensures compliance with tax laws but also helps you prepare for your business's financial future. For example, if you're thinking of expanding your business or need financial support, having your ITRs in order is crucial.
This is where Tata Capital comes in, offering tailored business loan solutions to meet your diverse business needs. With competitive business loan interest rates, Tata Capital makes it easier for small businesses to access the funds they need to grow. With a straightforward process and minimal business loan documents required, we ensure a seamless application process.
16 February 2024
6 mins read
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