Trading Business - Accounting for Startup

A trading business involves the buying and selling of goods and commodities, either domestically or internationally. Traders may operate as wholesalers, retailers, distributors, or agents and can deal in a wide range of products, including raw materials, finished goods, and services. Setting up and operating a trading business in India requires adherence to various taxation rules and compliance norms depending on the nature, size, and structure of the business.

1. Types of Trading Businesses

The structure of a trading business will affect its taxation and compliance obligations. Here are the most common business structures:

A. Sole Proprietorship

• Owned and run by a single individual.
• The easiest form of business to start but with unlimited liability.
• Suitable for small traders or individual businesspersons.
• Taxation is based on the personal income tax slab rates.

B. Partnership Firm

• A business formed by two or more individuals.
• Governed by the Indian Partnership Act, 1932 or Limited Liability Partnership Act, 2008 (for LLPs).
• Partners share profits, losses, and liabilities.
• Taxation: A flat rate of 30% tax on income, along with applicable surcharges and cess.

C. Private Limited Company

• A separate legal entity owned by shareholders, with limited liability.
• Suitable for larger trading businesses with significant capital and multiple investors.
• Taxation: Corporate tax rates apply as per the income earned.

D. Limited Liability Partnership (LLP)

• A hybrid form that combines the advantages of a partnership and a company.
• Provides limited liability to the partners.
• Taxed at a flat rate of 30% on income.

E. Public Limited Company

• A trading company whose shares are publicly traded on the stock exchange.
• Suitable for large-scale trading businesses with numerous shareholders.
• Taxation: Corporate tax rates apply, along with stricter compliance norms.

2. Taxation Rules for Trading Businesses

The taxation rules for trading businesses are based on the business structure, size, and type of transactions (domestic or international).

A. Income Tax

• Sole Proprietorship/Partnership Firms:
  • Income is taxed based on the personal income tax slab rates for sole proprietors.
  • Partnership firms are taxed at a flat rate of 30%, along with applicable surcharges and cess.
• Private/Public Limited Companies and LLPs:
  • Corporate Tax Rate:
    • 22% (without exemptions/deductions) under section 115BAA.
    • Surcharge of 10% for income above ₹1 crore and health and education cess of 4%.
  • For LLPs: The tax rate is 30%.

B. Goods and Services Tax (GST)

GST is a consumption-based tax levied on the supply of goods and services, including trading activities. It has replaced various indirect taxes like VAT, excise duty, and service tax.

• GST Rates: Depend on the type of goods being traded. Some common GST rates include:
  • 5% for essential goods and services.
  • 12% or 18% for most other goods.
  • 28% for luxury items or products deemed harmful (such as tobacco).
• Input Tax Credit (ITC): Trading businesses can claim input tax credit on the GST paid on goods purchased for trading.
• GST Registration: Any trader with an annual turnover of more than ₹40 lakh (₹20 lakh for certain special category states) is required to register under GST.
• GST Returns: Traders must file monthly, quarterly, and annual GST returns (GSTR-1, GSTR-3B, GSTR-9).

C. Customs Duty (for Import-Export Businesses)

Trading businesses involved in importing and exporting goods are subject to customs duty:

• Import Duty: Varies based on the type of product imported, typically ranging from 0% to 30%.
• Export Duty: Applicable to certain products, especially those considered valuable or in limited supply.

3. Compliance Requirements for Trading Businesses

A. Registration and Licensing

1. Business Registration: Depending on the business structure, registration with the Ministry of Corporate Affairs (MCA) is required for companies and LLPs.
2. GST Registration: As mentioned above, GST registration is mandatory for traders whose turnover exceeds the specified limits.
3. Import Export Code (IEC): If the trading business involves importing or exporting goods, an Import Export Code (IEC) is mandatory. The IEC is issued by the Directorate General of Foreign Trade (DGFT) and is a one-time registration requirement for international trade.
4. Shops and Establishment License: Traders running physical retail or wholesale outlets must obtain this license from the respective State Labour Department to ensure compliance with local labor laws.

B. Filing of Returns

1. Income Tax Return (ITR): All trading businesses must file their ITR annually, based on their income earned during the financial year.
2. GST Returns: Filing GST returns is mandatory as per the following schedule:
   • GSTR-1: Monthly or quarterly, depending on the business turnover, disclosing sales and outward supplies.
   • GSTR-3B: A monthly summary return showing total sales and input tax credit.
   • GSTR-9: An annual return to summarize all GST-related activities.
3. Tax Deducted at Source (TDS): If the trading business makes certain payments like salaries, rent, contractor fees, etc., it must deduct TDS and file quarterly TDS returns.

C. Labour Law Compliance

1. Provident Fund (PF) and Employee State Insurance (ESI): Trading businesses employing more than 10 employees must register for EPF and ESI and contribute toward employee welfare funds.
2. Gratuity: Applicable to businesses that have employed individuals for more than five years, providing a gratuity benefit upon retirement or resignation.
3. Minimum Wage Act Compliance: Ensure that employees are paid at least the minimum wage set by the respective state.

4. Accounting and Auditing Requirements for Trading Businesses

• Statutory Audit: Mandatory for private limited companies and public limited companies if their turnover exceeds ₹1 crore. In the case of LLPs, audit is required if the turnover exceeds ₹40 lakh or if the capital contribution exceeds ₹25 lakh.
• Tax Audit: Required if the turnover of a trading business exceeds ₹1 crore (for non-digital transactions) or ₹10 crore (for digital transactions) as per the Income Tax Act, 1961.
• Internal Audit: Larger trading companies may also need to conduct internal audits to ensure effective financial control and compliance with internal policies.
• Accounting Standards: All companies are required to maintain books of accounts in line with the prescribed accounting standards issued by the Institute of Chartered Accountants of India (ICAI).

5. Industry-Specific Compliance for Trading Businesses

Some trading businesses operate in regulated industries where additional licenses or permits are required:

• Pharmaceuticals: Traders dealing in pharmaceutical products must obtain a drug license from the Central Drugs Standard Control Organization (CDSCO).
• Food Products: For businesses trading in food products, a license from the Food Safety and Standards Authority of India (FSSAI) is mandatory.
• Alcohol and Tobacco: Traders in alcohol and tobacco need special licenses from excise departments, and these products are subject to higher taxes and stringent regulations.
• Agriculture Products: Businesses dealing in agricultural commodities like grains, pulses, fruits, and vegetables must comply with the Agricultural Produce Market Committee (APMC) Act.

6. Indirect Tax and Duties

Traders may have to comply with additional taxes and duties based on their operations, including:

• Octroi and Local Taxes: While octroi has been largely abolished after the introduction of GST, some local bodies may still impose local taxes for specific services.
• Entry Tax: Certain states levy an entry tax on goods entering their borders, primarily on imports from other states.

7. Incentives and Benefits for Trading Businesses

The government provides several incentives for trading businesses, especially those involved in international trade:

• Export Promotion Capital Goods (EPCG) Scheme: Allows traders to import capital goods at zero customs duty, provided they meet the export obligations.
• Merchandise Exports from India Scheme (MEIS): Provides duty credit scrips for traders exporting goods to incentivize exports.
• Interest Equalization Scheme: Offers subsidized interest rates to exporters to reduce their cost of borrowing.
• Special Economic Zones (SEZs): Businesses operating in SEZs get benefits like tax exemptions, duty-free imports, and simplified customs procedures.

8. Audit and Reporting Obligations

• Transfer Pricing: If a trading business has international transactions with related parties, it must comply with transfer pricing regulations, ensuring that transactions are conducted at arm’s length.
• Foreign Exchange Management Act (FEMA) Compliance: For businesses dealing with international trading, compliance with FEMA regulations is mandatory to manage foreign exchange transactions.

Conclusion

Trading businesses in India are subject to a wide array of taxation rules and compliance requirements depending on their structure, size, and industry. Compliance with GST, income tax, customs duties (for import-export businesses), and labor laws is crucial for smooth operations. Additionally, trading businesses must file their returns and maintain proper accounting records, in line with government regulations. With the right compliance strategies, traders can benefit from government incentives and grow their business domestically or internationally.