Compliance for Partnership Firms in India

All companies that are registered in India must adhere to compliances set by government bodies in order to operate at an optimum level. Some of the important requirements that they must fulfil are the filing of annual returns, maintenance of accounting records, adherence to tax regulations and statutory requirements.

Compliance for partnership firm is vital to ensure there is 100% accountability, transparency and a legal way of running operations in order to protect the stakeholders interests as well as keep up the firm’s name. Compliance consulting firms such as Alp Consulting are well versed in the field and can be instrumental for organizations to help keep up compliance at all times.

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Overview of Partnership Firms in India

Partnerships firms are form of business organizations where two or more people collaborate to manage and operate a business successfully. The partners enlisted in a partnership firm are to share the profits, losses, and responsibilities of managing the business as per the terms of the partnership agreement. This form of business structure is governed by the Indian Partnership Act, 1932 in India.

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Importance of Compliance in a Partnership Firm

Compliance in a partnership firm is crucial for several reasons, as it helps ensure that businesses are operating within the legal framework and are adhering to all relevant rules and regulations. Ensuring proper compliance, however, may not come as easily to all firms due to the complexity of the changing rules and regulations. As one of the top compliance consulting firms in India, Alp Consulting can help your organization maintain compliance and uphold the firm’s credibility, avoid legal issues and promote smooth business operations. Some of the key reasons why compliance for partnership firms is crucial are-

Adherence to tax laws and regulations to avoid legal penalties and fines
Maintenance of accurate and transparent financial records
Brings awareness to partners about each of their financial obligations to the firm
Better credibility and trustworthiness with clients, suppliers and investors
Legal certainty facilitating better business growth
Protects the rights and safety of its employees

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List of Important Compliances for a Partnership Firm

Compliance is crucial for the smooth running of a partnership firm. There are various periodic and annual compliances that partnership firm must follow.

Partnership deed

Creating and registering a partnership deed that outlines the terms and conditions of the partnership, with the registrar of firms gives a company legal recognition and protection. Although not mandatory, it is certainly advisable to form a deed.

Income Tax Compliance

If you are a partnership firm operating in India, you would certainly be aware that partnership firms are taxed at a rate of 30% of their total income. However, an important aspect to bear in mind is each partner is taxed according to the individual income tax slabs and their profits/losses will be reflected in their income tax returns, and the firm will also be taxed as a separate entity. Income tax compliance is an annual compliance that partnership firms must adhere to in India. To file the IT returns, partnership firms can choose from either of the two options mentioned below-

- ITR-4
This is applicable for firms who show a total income of up to 50 lakhs and income from the business and profession recorded based on a fair assumption.
- ITR-5
This is a mandatory form that firms are required to fill in order to undergo a tax audit, especially those firms that have had a turnover of over 1 crore in the previous financial year.

GST (Goods and Services Tax) Registration

Its mandatory for partnership firms to register for GST if their annual turnover is exceeding the threshold limit of 40 lakhs. Firms must file regular GST returns that include monthly, quarterly and annual returns as applicable. This mostly includes-

- GSTR-1 (supplies)
- GSTR-3B (consolidated return)
- GSTR-9 (annual return)

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TDS compliance

Primarily a partnership firm must obtain a TAN (Tax deduction and Collection Account Number) which is mandatory for all entities required to deduct or collect tax at source. TAN is necessary to deposit TDS with the government and for filing TDS returns. This applies to rent, interest and professional fees etc. Different forms like Form 24Q (salary) Form 26QB (immovable property transactions) and 27Q are used for TDS returns depending on the nature of the payment.

EPF return filing

Organizations that employ more than 20 employees must be registered under the EPF (Employees provident fund) scheme. It essentially protects the financial security and stability of employees’ post-retirement or in time of need. Both the employer and employee contribute to the EPF on a monthly basis. The accumulated amount, over a period of time earns interest.

Accounting and financial records

Partnership firms are to maintain proper accounts including balance sheets, profit and loss statements, cash flow statements etc, especially if they exceed an amount of 25 lakhs or if the income of the partners in business has exceeded 2.5 lakhs in any of the preceding 3 financial years.

Tax Audit

If a partnership firm has generated a business turnover of over 1 crore in the preceding financial year, they are required to undergo a tax audit, by a certified Chartered Accountant. However, if the firm opts for the presumptive taxation scheme under Section 44AD, the threshold limit for a mandatory tax audit is increased to ₹2 crore, provided the firm declares profit at a rate of 8% (6% in case of digital transactions) or more of the turnover.

Intimate changes

If in case there are some modifications that need to be made to the partnership deed, like additions, removal, partners, or dissolution, the registrar of firms must be intimated within 90 days. The changes could be

- Update of firm name, principal place of business, or nature of business.
- Notification of opening or closing of branches.
- Change of partner information, including name or address.
- Changes to the partnership agreement or dissolution of the firm.

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Consequences of Non-Compliance of Partnership Firm

Non-compliance in a partnership firm can cause various legal and financial problems. As one of the best compliance consulting firms in India, Alp Consulting can help you adhere to the applicable laws and regulations to avoid these legal issues.

Fines and Penalties

Statutory compliance for partnership firm is mandatory. Failing to meet the requirements of registration, tax filing or other regulatory filing will result in heavy fines and penalties. Depending on the severity of non-compliance, the amount may vary.

Legal proceedings

Failing to comply with rules and regulations can give way to legal proceedings by regulatory authorities, partners or stakeholders, which can further become court cases or other legal actions disrupting business operations.

Reputational damage

Non-compliance can result in damage of reputation of the partnership firm due to loss of trust among stakeholders, customers, suppliers and investors alike. The loss of goodwill will certainly affect business relationships and lead to loss of business.

Business disruption and conflicts

In an event of mis compliance, regulatory bodies may take legal action such as cancellation of licenses, asset seizures etc that can cause disruption in the business operations. Non-compliance can even lead to conflicts among partners, if there are disagreements over handling legal or financial matters resulting in loss of trust and communication among partners that may even cause breaking up of the firm.

Injunctions

Courts may issue injunctions that prevent the partnership firm from engaging in certain activities until it achieves compliance. Violating these injunction orders can result in additional legal consequences.

Personal liability

As the partnership is formed among individuals in a partnership, they have unlimited liabilities, meaning, they are liable for all debts and obligations of the firm. In case of non-compliance, partners will be held responsible for penalties, liabilities or other legal issues. If there is a case of tax evasion, fraud or other criminal charges, this is considered severe non-compliance, and the partners may be subject to criminal charges.

Documents Required for Online Partnership Compliance

There are some mandatory documents that are to be produced by the partners while registering their partnership firm. As one of the most reliable compliance providers in India facilitating compliance in partnership firm, Alp Consulting will ensure that all your documents are in place and are filed properly to ensure registration and compliance.

1 Proof of Identity and Address for Partners

PAN Card (copy) of each partner.
Aadhaar Card (copy) of each partner.
Passport (copy) or Voter ID (copy) can be submitted if one or both partners do not hold an Aadhaar Card.

2 Partnership Deed

A partnership deed must be drafted clearly outlining the rights, responsibilities, profit-sharing ratios, and dispute resolution mechanisms between partners.

Having a soft copy of the deed is required for online submission.

3 Address Proof for the Firm’s Registered Office

You can use any of the following documents as address proof:

Rent Agreement (copy) for the office space, if rented.
Electricity bill or water bill or any other utility bill copy for the office address, not older than 3 months.
NOC (No Objection Certificate) from the landlord (if applicable).

4 Online Compliance Filing

Once registered, your partnership firm needs to adhere to various regulations. Mandatory documents typically required for online compliance filing are-

PAN Card of the Partnership Firm: Like partners, the firm itself needs a PAN card.
Bank Account Details: This includes a copy of a cancelled cheque from the firm’s bank account.
ITR (Income Tax Return) Documents: While filing your firm’s ITR (typically ITR-5), you may need supporting documents like sale and purchase invoices, depending on the nature of your business.

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Having Alp Consulting as your compliance partner can be a strategic investment for your firm, securing a compliant business environment.

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