What is a Partnership firm?

A partnership firm is a type of entity where more than one person is carrying out business under one entity. Partnerships firms in India are of two types - Registered partnership firms and unregistered partnership firms.

Registering a Partnership is the right choice for small enterprises as the formation is straightforward and there are minimal regulatory compliances.

The Partnership Act has been in existence in India since 1932, making partnerships one of the oldest types of business entities in India. A partnership firm can even be registered after it is formed. There are as such no penalties for non Registration of a Partnership firm.

But unregistered Partnership firms are denied certain rights under section 69 of the Partnership Act that majorly deals with the effects of non Registration of Partnership firms.

The income tax defines a Partnership firm as “Persons who have entered into a partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. Hence, a firm that does not have a registration certificate from the registrar is an unregistered Partnership firm.

The tax rate for a Partnership firm.

What is the tax rate for a partnership firm?

A partnership firm is required to file a partnership firm income tax return under the Income Tax Act,1961. Partnership firms are liable to pay income tax at the rate of 30% of total income. Besides, a partnership firm is liable to pay an income tax surcharge of 12% if the total income exceeds Rs.2 crores.

Additional to the income tax and surcharge a partnership firm must pay the education cess and the secondary higher education cess.

Education Cess is applicable on the amount of the income tax and the applicable surcharge at the rate of 2%. Secondary and higher education cess is applicable on the amount of the income tax and the applicable surcharge at the rate of 1%.

Alternative minimum tax

Similar to a private limited company or LLP, partnership firms are also required to pay alternate minimum tax at the rate of 18.5% of "adjusted total income". Alternate minimum tax would be increased by the applicable surcharge, education cess, and secondary and higher education cess.

How to File Tax Returns for a Partnership Firm?

For Partnership income tax return filing should be done through Form ITR-5. This form ITR-5 is used to partnership firm income tax returns and not the tax returns for the partners.

Like all other income tax forms, ITR 5 is an attachment-less form and there is no requirement to submit any documents or statements along with the partnership firm tax returns. However, the taxpayers must save the records about business and produce the same before the tax authorities when requested.

ITR-5 can be filed online with the income tax department's online portal. The documents need to be submitted only when they are asked for. While filing the Partnership firm tax returns the partners must have class 2 digital signatures for verification of the filing process.

Procedure for filing Income tax returns of a partnership firm.

The income tax return of a partnership firm can be filed online through the income tax website or manually. If the income tax return is filed online then a class 2 digital signature will be required for the partner of the firm. Also, online income tax return filing is mandatory for partnership firms required to obtain an audit.

In case of manual filing, the assessee must print out two copies of Form ITR-V. One copy of ITR-V signed by the assessee has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bengaluru–560100 (Karnataka). The other copy should be retained by the assessee for his/her record.

Audit Requirement for Partnership Firms.

Partnership firms that satisfy any of the conditions below would be required to get accounts audited:

Carrying on business and total sales exceed Rs.2 crore in the previous year.
Carrying on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
Besides, there are other conditions applicable that could make an audit mandatory for a partnership firm.

If a partnership firm entered into international transactions or specified domestic transactions a report must be furnished in Form No. 3CEB under section 92E. For partnership firms required to furnish Form 3CEB, the deadline for filing a tax return is 30th November.