Krishna Kumar (Business) 20 February 2012

Vat & taxation of partnership firm

I would appreciate if someone could explain how VAT is calculated for a Partnership firm engaged in trading. Also, I would like to know the tax is computed for partnership firms.

Regards,

K.Kumar

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A V Vishal (Advocate) 21 February 2012

Each commodity passes through different stages of production and distribution before finally it reaches the Consumer. Some value is added at each stage of the production and distribution chain. Value Added Tax (VAT) is tax on value addition at each stage. Under VAT system, a dealer collects tax on his sales, retains the tax paid on his purchase and pays balance to the Govt. Treasury. It is a consumption tax because it is borne ultimately by the final Consumer. The tax paid by the dealer is passed on to the buyer. It is not a charge on the dealer. Hence, VAT is a multipoint tax system with provision for set off of tax paid on purchases at each point of sale.

The dealer pays VAT by deducting the tax paid on purchases (input tax) from his tax collected on sales (output tax). Hence, VAT = Output Tax – Input Tax.
For example: A dealer pays Rs.10.00 @ 10% on his purchase price of goods valued Rs.100.00. He sells the goods at Rs.150.00 and collects tax amounting to Rs.15.00 (@ 10%). He will pay Rs.5.00 (Rs.15.00- Rs.10.00) as he has already paid Rs.10.00 to his seller while purchasing those goods

A V Vishal (Advocate) 21 February 2012

TAXATION OF FIRMS

1.	Rate of tax	Flat rate of 30% on the total income after deduction of interest and remuneration to partners at the specified rates. (To be increased further by education cess @ 3% on Income Tax.)

2.	Interest to Partners	(Simple interest) Not exceeding 12% p.a. from 1-6-2002 (18% p.a. up to 31-5-2002)

3.	Remuneration to Partners	1.	Payment to a non-working partner will not be allowed as a deduction.
		2.	A ‘working partner’ is an individual who is actively engaged in conducting the affairs of the business or profession of the firm.
		3.	Quantum of allowance is to be determined with reference to ‘book profit’ which is defined to mean an amount computed in accordance with the provisions of Section 28 to 44D of the Income-tax Act, as increased by the amount of remuneration to partners if deducted in determining book profit.

4.	Conditions for allowance of remuneration and interest to partners	1.	Remuneration should be to a working partner.
		2.	Payment of remuneration and interest should be authorised by and should be in accordance with the terms of the partnership deed and should relate to any period falling after the date of such partnership deed.
		3.	No deduction u/s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration — Circular No. 739 dt. 25.3.1996.

5.	Conditions for assessment as a firm	1.	The partnership should be evidenced by an instrument in writing specifying individual shares of the partners.
		2.	A certified copy of the instrument signed by all the partners (not being minors) shall accompany the return of the firm for the first assessment as a 'firm'.
		3.	In case of any change in the constitution of the firm or shares of the partners in any previous year, the firm shall furnish a certified copy of the revised instrument of partnership signed by all the partners (not minors) along with the return of income for that A.Y.
		4.	If any default is made in compliance with the above provisions, the firm will be assessed as a firm without deducting interest and salary to partners from A.Y. 2004-05 onwards and as an AOP up to A.Y. 2003-04.
		5.	If any failure is made as mentioned in S. 144 (ex parte assessment) the firm shall be assessed as a Firm from A. Y. 2004-05 without deducting interest and salary to partners and as an AOP up to A.Y. 2003-04.

6.	Partners' assessments	1.	Once tax is paid by firm, no tax will be payable by the partners on share of income from the firm.
		2.	Interest and/or remuneration etc. received by a partner will be taxed in his hands as ‘Business or Professional Income’, excluding the amount disallowed in the hands of the firm in excess of limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in S. 144 or non compliance of S. 184.

7.	Losses of the firm		Unabsorbed loss including depreciation in respect of A.Y. 1993-94 onwards of the firm will not be apportioned amongst the partners and will be carried forward by the firm only.

8.	Allowability of remuneration and interest vis-a-vis presumptive taxation		Remuneration and interest will be allowed from the presumptive income computed at prescribed rate u/ss. 44AD, 44AE & 44AF.

TAXATION OF FIRMS

1.	Rate of tax	Flat rate of 30% on the total income after deduction of interest and remuneration to partners at the specified rates. (To be increased further by education cess @ 3% on Income Tax.)

2.	Interest to Partners	(Simple interest) Not exceeding 12% p.a. from 1-6-2002 (18% p.a. up to 31-5-2002)

3.	Remuneration to Partners	1.	Payment to a non-working partner will not be allowed as a deduction.
		2.	A ‘working partner’ is an individual who is actively engaged in conducting the affairs of the business or profession of the firm.
		3.	Quantum of allowance is to be determined with reference to ‘book profit’ which is defined to mean an amount computed in accordance with the provisions of Section 28 to 44D of the Income-tax Act, as increased by the amount of remuneration to partners if deducted in determining book profit.

4.	Conditions for allowance of remuneration and interest to partners	1.	Remuneration should be to a working partner.
		2.	Payment of remuneration and interest should be authorised by and should be in accordance with the terms of the partnership deed and should relate to any period falling after the date of such partnership deed.
		3.	No deduction u/s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration — Circular No. 739 dt. 25.3.1996.

5.	Conditions for assessment as a firm	1.	The partnership should be evidenced by an instrument in writing specifying individual shares of the partners.
		2.	A certified copy of the instrument signed by all the partners (not being minors) shall accompany the return of the firm for the first assessment as a 'firm'.
		3.	In case of any change in the constitution of the firm or shares of the partners in any previous year, the firm shall furnish a certified copy of the revised instrument of partnership signed by all the partners (not minors) along with the return of income for that A.Y.
		4.	If any default is made in compliance with the above provisions, the firm will be assessed as a firm without deducting interest and salary to partners from A.Y. 2004-05 onwards and as an AOP up to A.Y. 2003-04.
		5.	If any failure is made as mentioned in S. 144 (ex parte assessment) the firm shall be assessed as a Firm from A. Y. 2004-05 without deducting interest and salary to partners and as an AOP up to A.Y. 2003-04.

6.	Partners' assessments	1.	Once tax is paid by firm, no tax will be payable by the partners on share of income from the firm.
		2.	Interest and/or remuneration etc. received by a partner will be taxed in his hands as ‘Business or Professional Income’, excluding the amount disallowed in the hands of the firm in excess of limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in S. 144 or non compliance of S. 184.

7.	Losses of the firm		Unabsorbed loss including depreciation in respect of A.Y. 1993-94 onwards of the firm will not be apportioned amongst the partners and will be carried forward by the firm only.

8.	Allowability of remuneration and interest vis-a-vis presumptive taxation		Remuneration and interest will be allowed from the presumptive income computed at prescribed rate u/ss. 44AD, 44AE & 44AF.