Rohit started blogging since his college days, earning revenue mainly from publishing advertisements on his blogs. Even though this was his main revenue earning activity, he never took it seriously. He realised this when he was appended with a notice from the tax department, asking him to explain why strict penal provisions should not be imposed on him, considering he contravened taxation provisions, such as filing IT returns, payment of taxes, withholding compliances, maintenance of books of accounts, service tax compliances.
This article intends to create awareness among businesses and start-ups with regard to accounting and taxation compliances, so that they do not get caught unprepared risking sudden closure of their business as was in the case of Rohit.
Small businesses may find accounting a waste of time, but it is the protein of your business diet, which would eventually show muscles of your business, businesses should not ignore accounting.
Here are five pointers for regular maintenance of books of accounts:
Proper disclosures of assets and liabilities of business on a specific date suggest proprietary interest of owner and solvency of business.
Accounting builds trust. Entrepreneurs should employ effective accounting methodology and maintenance mechanisms to account all expenses, revenue and financial transactions in order to build trust in minds of investors, stakeholders, business partners with regard to true and fair view of financial health of the business.
Accounting is mandated by tax and regulatory provisions. Section 44AA of the Income Tax Act, compulsorily requires maintenance of books of accounts, and there is stringent penalties prescribed for non-maintenance of same.
Facilities budget comparisons. For instance a periodical summary of all known costs, over time, will indicate the revenue necessary to support these costs, which will also suggest the financial viability of the business. It also helps in ratio analysis for better management of business.
Efficient accounting makes funding smooth, as you would need to provide financial details such as operating margin pattern, sales pattern, break-even horizon, the business entity profile, shareholding pattern and host of other details to the investors, and which is possible only with regular maintenance of books of accounts.
Evading taxes adventurous but fatal
There is a myth in the minds of businesses, especially with start-ups that till the time they do not start making profits, they do not need to pay taxes, but there is more than just paying up taxes. Businesses need to comply with various tax compliances.
Here are a set of pointers for regular and timely tax compliances:
Even under a situation where your business is incurring initial business losses, it is advisable to file regular tax returns in order to claim set off of business losses with profits of subsequent years. Also there are stringent penal provisions for non-filing of tax returns.
Option of not deducting/under-deducting tax at source, or non-filing of TDS returns, not only leads to tax evasion, but may also attract interest and penalty under the provisions of Income Tax Act, 1961, such as non-deduction of such payment as expenses.
While determining tax liability, all expenses incidental to business activities is allowed as deduction, with regular filing of tax returns. For instance, depreciation is allowed on fixed assets like computers, equipments and tools. Taxes, duties, cess and fees payable to statutory bodies can be allowed on payment basis.
Avoidance of service tax on the value of taxable services rendered is not a smart idea, since non-compliance of service tax provisions would attract penal interest and stringent penalty from Tax Department.
Penalty provisions will be attracted on failure to pay tax and interest, failure to comply with notices, concealment of incomes, non-complying tax audit compliances and furnishing inaccurate particulars of income.
Small businesses find it difficult to focus on accounting and taxation in the initial phase, thus it is worth investing in a professional, where you keep all bills and invoices, and make sure to keep your business and personal finances separate. A professional would be able to do books of accounts each week /month and regular taxation compliances.
Alok Patnia is the founder of Taxmantra.com, an online provider of individual taxation, business incorporation & maintenance services.