ADDITIONAL INCOME LIABILITIES

Financial advisor Anil Mehra inaugurated his franchise of a sweet shop chain, Sweet Bengal, in Mumbai two weeks earlier. He believes his first business venture will earn him around 30 per cent post-tax returns annually, higher than what most other instruments offer. A similar sentiment is echoed by banker Amit Roy, who opened his first franchise of Hangla's, arestaurant chain, five months before. The challenge for both is that along with balancing a full-time job and the franchise, they must also manage tax liabilities arising from the dual income. In taxation parlance, income arising from separate streams – salary and business. This would depend mainly on the nature of the entity. That is, whether the business has been registered as a partnership firm or a sole proprietorship. In the first case, the tax liabilities of your business venture would have to be filed and paid separately. In the latter, the profits would be clubbed with your salary and taxed according to slab. Either way, the taxes (on business income) will be paid after claiming a deduction of all expenses like rent, salaries, utility bills and so on, at each advance tax deadline. Advance tax is paid on the 15th of September, December and March, every year. Franchise fees (mostly paid for a period of up to 10 years) can be amortised over the period. For a partnership firm, it's usually easier, as there is a clear demarcation between personal and business accounts. Sole proprietors are also advised to do so. Arvind Rao, a chartered accountant and certified financial planner, advises his clients to maintain a separate bank account to pay bills and deposit income to create documentary evidence if needed. Income from partnership firms/businesses is taxed at a flat rate of 30.9 per cent (including education cess and surcharge). According to Vineet Agarwal, director, tax and regulatory services at KPMG, individuals like Mehra and Roy can decide whether the income or profit earned must be distributed between their business partners according to the pre-decided profit sharing ratio before or after tax liabilities are met. For instance, Roy's franchise generates a profit of Rs.10 lakh. He can either split this amount between the partners, who, in turn, will bear tax liability or, pay tax first and distribute the remaining money later. There could be an advantage in choosing to distribute pre-tax profits for those who do not fall in the highest tax bracket. Irrespective of the option picked, there will be no double taxation in this case. An option that Kavita Kanade, tax partner at Mukund M Chitale Chartered Accountants, suggests is the remuneration route. "Partnerships can claim a certain component of the remuneration granted to employees as a deductible expenditure," she says. However, this amount is taxable in the hands of the receiver. Businessmen use this option by showing that as income of family members, usually of retired parents or a spouse who is not working and don't cross the basic exemption levels. This helps save tax. Another important aspect is whose name the business venture is in. For instance, Mehra's employer does not allow employees to own/run any business simultaneously with their jobs. Therefore, Mehra has started the franchise in his parents' name. On paper, all liabilities must be managed by his parents. In reality, this means double work for Mehra, who will manage his tax liabilities plus his parents'. Finally, tax returns. Until now, you may have filed these using Income Tax Return (ITR) form 1 or 2, that specify heads like salary, other sources of income or income from house property. "In case of one-off business or professional incomes, one may use ITR 1 and specify it under the head of `other sources'," says Agarwal. But, in case of regular business incomes like that for Mehra and Roy, you will need ITR 4S. - www.business-standard.com