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Tax planning tips for start-ups

Last updated on: December 24, 2013 14:00 IST

Tax planning tips for start-ups

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Alok Patnia

Starting a business seems to be quite interesting but running it properly and hassle free really requires a lot of hard work, dedication and patience. To remain hassle-free and for healthy conduct of business, every business owner should follow correct tax compliances for paying service tax, TDS, return filing, etc.

Here are some tax planning tips for start-ups:

Any individual or company who is doing business (not having salary income) need to pay income tax in advance a couple of times during the year else they need to pay interest for delay in paying taxes.

Also, short term accountancy and tax compliance can often lead to long term conflict of financial objectives of a business or an individual.

So, proper tax planning is one of the most important steps to develop a business and run it smoothly.

The following points should be kept in mind from tax-planning perspective:

Analyse your business structure

The first and foremost thing which start-ups first decide is the structure of an organisation and its form. The type or form of organisation which an entrepreneur would like to choose depends on the type of risk s/he is ready to bear.

One should carefully think while considering whether s/he should like to run her/his business as a private limited company or sole-proprietorship, or partnership.

For example: If an organisation is having gross total income of about Rs 200,000, then it is better to function as a sole proprietorship and enjoy the tax slab benefit.


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Tax compliance

Every start-up needs to determine the tax compliance they need to do. Controlling tax due dates is one of the important tasks which is required to be followed by every start-up in order to avoid penal provisions.

Book-keeping

For every start-up, money which comes in is treated as income and money going out from the business as expense. In other words, cash method is followed where income and expenses are tallied and the difference arising is considered either as profit or loss to the business.

Income tax return compliances

Filing of income tax return is the most authentic proof of the income earned wherein all are required to file their tax returns within the due date showing all the income earned by them. But, many start-ups do not file tax returns, the reason for which is very simple: Unawareness of facts. In this regard too, a proper tax consultant should be appointed who can help the start-ups in availing the benefits of filing tax return in time.

Some of the benefits are as under:

Filing timely returns saves one from the assessments of income by the income tax officials.

A business having losses can carry forward their losses and get it set-off with future profits.

For making an investment, filing of income tax return on time is essential.

Tax refunds can be claimed only when income tax return is filed.


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Documentation

Proper maintenance of working files and documents is called documentation. Documentation is one of the main steps towards proper tax planning. Maintaining tax records, such as income statements, balance sheets and purchase receipts, helps in preparing the tax returns as well as it also helps in developing the business and managing it properly.

Also, in case any intimation or notice is received from the department, proper documentation of files helps a lot to get out of the problem.

Use reliable accounting software

Doing all works manually creates lot of confusion and irritation, resulting into wrong financial reporting. So, to ensure that minimal time is spent on book-keeping and fewest possible mistakes occur start-ups need to invest in capable accounting and tax preparation tools and learn to use them effectively.

For accounting, quick books, Tally ERP, etc. is recommended as this software is very handy and easy to use.

Hiring a professional

A small business can run smoothly and hassle free, if a knowledgeable professional handles their finances and tax issues. It's the responsibility of the small business owners to hire a professional for proper compliances and tax planning.

Tax professionals provide advice and guidance regarding deductions and credits as they carry knowledge about the tax laws and codes that could affect the businesses. Tax professionals, such as accountants and chartered accountants, can assist them throughout the year with proper tax planning.


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Paying taxes quarterly

There are various taxes which are required to be paid on a quarterly basis to the government. Prior, to the payment of such taxes, proper computation is required to be done by an experts or by professionals. Payment of such taxes is required, if the appropriate conditions are applied on the start-ups which in turn depends on the type of the form of organisation selected by them.

For example: Provision of service tax gets applied if the total gross turnover exceeds Rs 10 lakh.

Advance tax compliances

Another measure which is introduced by the Government is the concept of Advance Tax which is applicable only if the total tax liability of an organisation exceeds Rs 10,000. Everyone does not have to pay advance tax. So, the applicability of such provisions is required to be understood by every start-up as they are unaware of such facts. For, this, every entrepreneur is required to hire a professional.

Tax deducted at source

TDS or tax deducted at source is one of the modes of collecting income tax from the assessee in India and paying the same to the Government. TAN is mandatory to be applied for proper collection and deduction of taxes.

Most of the start-ups do not know even when and why to follow such compliances. They are totally unaware about the various sections of TDS in which taxes are deducted. So, a proper guidance is required to assist entrepreneurs run their businesses smoothly.


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