New Startup - Need Advice

Tax queries 609 views 8 replies

Ashish Patrick

Owner

45 Points Joined January 2011

Hello All,

This is my first post in the forum as I need some professional advice and help. Let me clear the scenario in brief.

I was working a better part of last year for a SMB based in Bombay till May 2010. While working there, I started taking up projects part time from Feb onwards for SMB clients based in USA/Australia. These clients paid me by use of Paypal and other online transaction channels for my services in USD. Once the client base was good, I quit my job and started working full time on these projects. My company filed the IT return for my salaried income till Mar 2010 last year. Since then, I haven't paid or filed any IT returns for my business income. Over 95% of the business income has been earned after March to the tune of 35,000 USD till date. Questions:

1) When do I need to fill the IT Returns?

2) The tax is payable on which income - My paypal USDs or the income which comes into my bank account after witdrawing from Paypal?

3) What can I show as business expenses? Majority of my work is for US clients so I never visit them. I don't have an office either. Operate the business from my 2 laptops at home and internet primarily. My major expenses this year have been a purchase of a new car, two laptops bought, invoices for my home renovation and lots of small bills for eating out, purchases of electronic items like printers, pen drives, small budget for my adetc.

4) I currently have income flowing into my prior salary bank account only. Should I start a new savings account for business income/expenses?

5) I planned earlier to open an account by a biz name ="ABC Technologies" but banks require a proof. A CA i consulted personally said "use a shop and establishment act" and apply for "IE code" is it necessary?

This message may be long and would be glad to have professional advice on the same.

Thanks.

Replies (8)

U S Sharma

glidor@gmail.com

21068 Points Joined January 2010

1. you have to form an establishment identity 1st, with trade licence, shop & establishment licence, and IE code.

2. you have open a Current account in name of your establishment, prefer the forex branch, it will avoid delay in encashment.,

3. you can make licence at home address even.

4, regarding the past receipts/ paypal , pls share the services u paid, and mode of information to them regarding charges, i.e invoice or bills, nature of your clients establishment, i .e personal use or establishment use.

5. Right now u dont have to worry too much, enough time u have to adjust the things and file a well defined return within 31-03-2011

Ashish Patrick

Owner

45 Points Joined January 2011

Hello Sir. Thanks for the quick advice.

1) What is an establishment identity ? Is it a business name - like "ABC technolgies" in my case. Can you give me links where can I start to apply for these licenses etc. Is it better if I start this entity in the next financial year and till then continue transactions in my personal account till then?

2) What is the deadline for the tax returns - mar 31st or jul 31st..m a bit confused on this one?

3) The nature of service is marketing consultant. I send them invoices (kachha bills) to which they pay money in my paypal account, since they are based in US. Few expenses like laptops etc are used exclusively for business. The car is for 20% business and 80% personal use I would say. The other expenses were mainly personal like home renovation (but since I work out of home, I can claim some % of it like renovating my office type)?

4) The tax is payable on which income - My paypal USDs or the income which comes into my bank account after witdrawing from Paypal?

Thanks,

Patrick

U S Sharma

glidor@gmail.com

21068 Points Joined January 2010

Originally posted by : Patrick Sherrin

Hello Sir. Thanks for the quick advice.

1) What is an establishment identity ? Is it a business name - like "ABC technolgies" in my case. Can you give me links where can I start to apply for these licenses etc. Is it better if I start this entity in the next financial year and till then continue transactions in my personal account till then?

Business identity means an establishment , where u can be sole owner, partner, director etc. yes it looks like ABC technogies or anything else,

go to municipal corporation and get one trade licence ( Certificate of establishment) 1st, its basic document which will be needed every part of govt registration like pan card.

2) What is the deadline for the tax returns - mar 31st or jul 31st..m a bit confused on this one?

31st july is for 2010-11 returns, sorry i did not noticed that ur return for 2010 was filed by your employer, so better to ignore the paypal for now,

means ur clients dont need any invoice or bills.......right?

Laptops and Car is your personal effect, if we use pen to sign a business document that does not goes for asset as on now, laptop u buy in name of office will get depreciation and would be counted in assets of establishment, but thats all after formatino of establishment. balcne expenses u done are just ur expenses, nothing related to business.

regarding purchase of car only, ensure that your salary income caters the cost of car. i e your income tax return filed money is enough to buy a car.

4) The tax is payable on which income - My paypal USDs or the income which comes into my bank account after witdrawing from Paypal?

paypal is not a secured system of transactions, u will have to ask the clients for remittence through SWIFT to your current bank account in name of establishment.

Thanks,

Patrick

Ashish Patrick

Owner

45 Points Joined January 2011

Hello Sir, thank you. Yes most of the clients need invoices, some don't. I just give it to them in my name - in plain word docs.

As regards the expenses, so how do I show the car and home renovation etc, is there a need?? My salary income was peanuts as compared to business income, so the car is difficult to show as coming from salary. So what do you recommend - I don't show any income till that business entity is established i.e no income from June onwards till date of entity formation? I am just worried since the amount withdrawn till date is around 8-9 lacs June onwards till date (from Paypal)

Thanks,

Patrick.

U S Sharma

glidor@gmail.com

21068 Points Joined January 2010

perhaps u are unware of consequences of what you are doing !!

dealing in forex without IE code or RBI approval may drag u to FEMA !!

Ashish Patrick

Owner

45 Points Joined January 2011

Yes, being from non finance background hindered me. The CAs that I have met till date just asked me to proceed as it is and told me we will see it all the time of filling the returns. They said 100s of freelancers operate from India and unless the amount is really substantial, it should not be a cause of worry.

Could you please best let me know of the steps now to take to rectify the situation? What steps should be taken?

Ashish Patrick

Owner

45 Points Joined January 2011

Can I please have advice of one other CA on this matter?

Yahoo

Nothing

21 Points Joined October 2011

Hello Pattrick, Your queries are quite common as any individual starting on his own would likely face. I'm curious to know how you tackled your situation since it has been few months already.

1) How do you receive the payments - into your business account or personal account or still paypal?

2) How do you separate out personal expenses from business expenses such as car, restaurant etc.,?

3) Is there any issue of pulling out money from the business account as and when needed or any amount needed? OR one has to only pull out the fixed salary amount and deduct TDS on the same?

4) Do you show any profit for your business? How do you take out that profit amount? If it's pvt ltd company then you have to declare dividend and pay tax on the same before distributing the dividend from the company account. In addition to that you have to pay tax from your account for the dividend amount that you receive. Quite complicated. So is it a better idea not to show any profit and take everything as salary and pay tax on the same.