Taxation

The letter that ruined Bhandari uncle's morning

It's a Thursday morning in Haldwani. Bhandari uncle opens his shop at 9 AM, like every day for the last 22 years. His helper hands him the mail. Most of it is junk — distributor flyers, a water bill. But one envelope has "Government of India" printed on it. He opens it and his stomach drops.

It's a GST notice. Something about "mismatch in GSTR-3B and GSTR-2A for Q3." He doesn't fully understand the words, but he understands the tone. It feels like trouble.

He calls his CA immediately. "Sharma ji, kuch notice aaya hai GST ka. Kya galat ho gaya?"

Sharma ji, who has been handling Bhandari uncle's taxes for 15 years, calmly says: "Send me a photo. It's probably a minor mismatch — your supplier filed late. I'll sort it out. But uncle, I've been telling you — you need to check your returns every quarter, not just sign whatever I send you."

Bhandari uncle sits down, relieved but shaken. He realizes that after 22 years of running a business, he still doesn't really understand his own taxes. He just hands everything to the CA and hopes for the best.

That's how most small business owners deal with tax. Hand it off, don't ask questions, and pray nothing goes wrong.

This chapter is going to change that. Not by turning you into a CA — that's their job, and you should absolutely hire one. But by giving you enough understanding that you know what's happening with your money, why certain things are done the way they are, and what questions to ask.

Tax isn't exciting. But neither is a notice from the government. Let's make sure you never get one you can't explain.

Income Tax: the government's share of your earnings

Every business that earns money pays income tax. How much you pay depends on how your business is structured.

If you're a sole proprietor (most small businesses)

This is the simplest structure. Your business income is treated as your personal income, and you pay tax on the same slabs as any individual.

For FY 2024-25 (new tax regime):

Pushpa didi's chai-maggi shop is a sole proprietorship. Let's say after all expenses, her taxable profit for the year is ₹5 lakh. Under the new regime, her first ₹3 lakh is tax-free, and she pays 5% on the next ₹2 lakh — that's ₹10,000. With the ₹25,000 rebate under Section 87A, she actually pays zero tax. Not bad.

If you're a partnership firm

Flat rate: 30% on the firm's total income, plus a 4% cess. That's it. No slabs. Doesn't matter if the firm earned ₹5 lakh or ₹5 crore — it's 30%.

This is why partnerships can be expensive tax-wise for smaller businesses. If Neema and Jyoti set up their homestay as a partnership firm earning ₹8 lakh profit, they'd pay 30% = ₹2.4 lakh in tax. As individual proprietors splitting the same income, they'd pay significantly less.

If you're a company

25% flat rate (plus surcharge and cess, effective rate around 25.17% for most small companies). Companies also pay a Dividend Distribution Tax if they distribute profits, though now dividends are taxed in the hands of the shareholder.

When does it make sense to become a company? Generally, when your profits are consistently above ₹10-15 lakh per year and growing. Below that, a proprietorship is simpler and cheaper. We covered business structures in the Legal chapter — go back and review if you need to.

GST: the tax that changed everything

Before 2017, India had a mess of indirect taxes — excise duty, VAT, service tax, entry tax, octroi. Every state had different rates. Moving goods across state borders was a nightmare of paperwork and checkposts.

Then came GST — Goods and Services Tax. One nation, one tax (mostly).

What GST actually is

GST is a consumption tax. It's charged at every stage of the supply chain, but ultimately, the end consumer pays it. Businesses in the middle just collect it and pass it on to the government.

Here's how it works through Bhandari uncle's supply chain:

Manufacturer sells cement to Distributor:
  Price: ₹300 per bag
  GST @18%: ₹54
  Distributor pays: ₹354
  (Manufacturer collects ₹54, sends it to government)

Distributor sells to Bhandari uncle:
  Price: ₹350 per bag
  GST @18%: ₹63
  Bhandari uncle pays: ₹413
  (Distributor collected ₹63, but already paid ₹54 to manufacturer.
   Distributor sends only ₹63 - ₹54 = ₹9 to government)

Bhandari uncle sells to customer:
  Price: ₹420 per bag
  GST @18%: ₹75.60
  Customer pays: ₹495.60
  (Bhandari uncle collected ₹75.60, but already paid ₹63 to distributor.
   Bhandari uncle sends only ₹75.60 - ₹63 = ₹12.60 to government)

Total GST collected by government: ₹54 + ₹9 + ₹12.60 = ₹75.60

That's exactly 18% of the final selling price of ₹420. The tax cascaded through the chain, but each person only paid the difference. This is the magic of GST.

Input Tax Credit — the heart of GST

That "difference" we just calculated? That's Input Tax Credit (ITC) at work.

ITC means: the GST you paid on your purchases (inputs) can be subtracted from the GST you collected on your sales (output).

GST you collected from customers:     ₹75.60
GST you paid to your suppliers:      - ₹63.00
                                     --------
GST you actually owe the government:   ₹12.60

This is why GST invoices matter so much. If your supplier doesn't give you a proper GST invoice, you can't claim ITC. You end up paying the full ₹75.60 to the government instead of ₹12.60. That's a ₹63 per bag loss.

This is what happened to Bhandari uncle. One of his cement suppliers was filing returns late. The supplier's invoices showed GST charged, but since the supplier hadn't filed his own returns, the system showed a "mismatch" — Bhandari uncle was claiming ITC that the government couldn't verify. Hence the notice.

Lesson: your GST compliance is only as good as your suppliers' compliance.

Do you even need GST registration?

Not every business needs to register. The thresholds are:

But — there are cases where you must register regardless of turnover:

• If you sell across state lines (inter-state supply)
• If you sell on e-commerce platforms (Amazon, Flipkart)
• If you're required to deduct TDS under GST

Ankita sells her pahadi food products on Instagram and ships across India. Even though her turnover is only ₹12 lakh, she needs GST registration because she's making inter-state supplies. She found this out the hard way when Amazon rejected her seller application for not having a GSTIN.

GST Returns — the paperwork

If you're GST registered, you need to file returns. The main ones:

GSTR-1 — Details of all your outward supplies (sales). Filed monthly (if turnover > ₹5 crore) or quarterly (if turnover < ₹5 crore under the QRMP scheme). Due by the 11th/13th of the following month/quarter.

GSTR-3B — Summary return. This is where you declare your total sales, total purchases, ITC claimed, and the net tax you're paying. Filed monthly or quarterly. Due by the 20th of the following month.

GSTR-9 — Annual return. A summary of the whole year. Due by 31st December of the following financial year.

Think of it like this: GSTR-1 is the details, GSTR-3B is the summary, and GSTR-9 is the annual report card.

GST Compliance — the things that trip people up

Invoicing: Every GST invoice must have your GSTIN, the buyer's GSTIN (if registered), HSN code for goods or SAC code for services, rate of tax, and the tax amount shown separately (CGST + SGST for local sales, IGST for inter-state sales).

HSN Codes: Every product has a classification code. Cement is 2523, iron and steel is 7208, tea is 0902. Your CA will help you figure out the right codes, but you should know your main products' codes. Getting this wrong can mean paying the wrong tax rate.

Filing deadlines: Miss a deadline, and you pay ₹50 per day late fee (₹20 for nil returns). It adds up fast. Miss it for too long, and your registration can be suspended.

Reconciliation: Every quarter, cross-check that what your suppliers reported matches what you're claiming as ITC. This is where Bhandari uncle's problem came from. Your CA should do this, but you should ask about it.

The Composition Scheme — simpler, cheaper, limited

If your turnover is below ₹1.5 crore (₹75 lakh for service providers), you can opt for the Composition Scheme. Instead of the regular GST process, you pay a flat rate:

The trade-off:

• You cannot charge GST on your invoices (your price IS the final price)
• You cannot claim Input Tax Credit
• You cannot sell inter-state (only within your state)
• You file only one return per quarter (CMP-08), much simpler
• You cannot sell on e-commerce platforms

For Pushpa didi's chai-maggi shop, the Composition Scheme makes perfect sense. Her turnover is around ₹8-10 lakh, all local sales, and she doesn't need ITC because her inputs (milk, tea, vegetables) are mostly bought from unregistered local vendors anyway. She pays 1% quarterly and files one simple return. Done.

For Bhandari uncle, Composition would be a bad idea. His turnover is above ₹1 crore, and losing ITC on all his inventory purchases would cost him lakhs.

TDS: Tax Deducted at Source

TDS is the government's way of collecting tax as income is earned, rather than waiting until the end of the year.

Here's when it matters for small businesses:

When TDS is deducted FROM you

If you do work for a company or a government body, they'll deduct TDS before paying you.

Neema and Jyoti's homestay gets a contract with a corporate travel company to host team retreats. The company books ₹2,00,000 worth of stays. But when the payment comes, it's only ₹1,80,000. The company deducted 10% TDS (₹20,000) and deposited it with the government on Neema's behalf.

That ₹20,000 isn't lost — it's a prepayment of Neema's income tax. When she files her return at year-end, she claims credit for the TDS already deducted and pays only the remaining tax.

When YOU need to deduct TDS

If your business pays certain amounts above threshold limits, you become responsible for deducting TDS:

• Salary to employees — TDS based on their income slab
• Rent above ₹2.4 lakh per year — deduct 10%
• Professional fees above ₹30,000 per year — deduct 10%
• Contractor payments above ₹30,000 (single payment) or ₹1 lakh (annual) — deduct 1% (individuals) or 2% (companies)

Vikram's franchise outlet in Dehradun pays ₹3 lakh rent per year and ₹50,000 to an interior designer. He needs to deduct TDS on both — 10% on rent (₹30,000) and 10% on the designer's fee (₹5,000). He deposits this with the government and gives the landlord and designer TDS certificates (Form 16A).

Not doing this? The penalty is that the expense becomes non-deductible. Vikram paid ₹3 lakh rent, but if he didn't deduct TDS, the tax department won't let him claim it as a business expense. He effectively loses the tax benefit of that entire ₹3 lakh.

To deduct TDS, you need a TAN (Tax Deduction Account Number). Apply for it on the TRACES portal. Your CA will handle the quarterly TDS returns (Form 26Q).

Advance Tax: pay as you go, not all at once

If your total tax liability for the year is more than ₹10,000, you're expected to pay it in installments throughout the year — not as a lump sum in March.

The schedule:

Rawat ji estimates his juice business will earn ₹6 lakh profit this year. His estimated tax is about ₹33,000. He needs to pay:

• ₹4,950 by June 15
• ₹9,900 more by September 15 (total ₹14,850)
• ₹9,900 more by December 15 (total ₹24,750)
• ₹8,250 more by March 15 (total ₹33,000)

Why does this matter? If you don't pay advance tax and dump the entire amount at filing time, you'll be charged interest under Section 234B and 234C. It's 1% per month — not catastrophic, but completely avoidable.

Exception: If you've opted for presumptive taxation under Section 44AD (we'll get to this shortly), you can pay your entire advance tax in one shot by March 15. No quarterly installments needed.

Tax Planning: legal ways to keep more of what you earn

Tax planning is not tax evasion. Tax evasion is hiding income or faking expenses — it's illegal and will eventually catch up with you. Tax planning is using the provisions of the tax law to minimize your tax legally. Every smart business owner does it.

1. Claim every legitimate business expense

Your taxable profit = Revenue - Expenses. The more genuine business expenses you claim, the lower your taxable profit, and the lower your tax.

Expenses you should be claiming:

• Rent for your shop, office, or workspace
• Salaries and wages paid to employees and helpers
• Raw materials and inventory purchased
• Electricity, water, phone bills for the business premises
• Travel expenses related to business (supplier visits, delivery, client meetings)
• Vehicle expenses if used for business (fuel, maintenance — proportional to business use)
• Insurance premiums for the business
• Interest on business loans
• Professional fees — CA, lawyer, consultant
• Repairs and maintenance of business equipment
• Marketing and advertising costs
• Software, tools, and subscriptions used for business
• Depreciation on assets (we'll cover this below)

Ankita runs her pahadi food brand from a rented room in Dehradun. She uses her phone and laptop for Instagram marketing, her car for deliveries, and pays for product photography. All of these are business expenses. Last year, she missed claiming ₹45,000 in phone bills, fuel costs, and photography fees because she didn't keep the receipts. At a 20% tax rate, that's ₹9,000 in unnecessary tax.

Keep. Every. Receipt.

2. Section 44AD — Presumptive Taxation

This is a gift for small businesses. If your total turnover is below ₹2 crore (₹3 crore if 95% or more of payments are digital), you can declare your profit as a fixed percentage of turnover and skip maintaining detailed books of accounts.

The presumptive profit rates:

• 8% of turnover received in cash
• 6% of turnover received digitally (UPI, bank transfer, card)

Bhandari uncle's hardware shop has a turnover of ₹1.2 crore. Let's say ₹80 lakh comes through digital payments and ₹40 lakh in cash.

Presumptive profit = (₹80 lakh x 6%) + (₹40 lakh x 8%) = ₹4.8 lakh + ₹3.2 lakh = ₹8 lakh

His actual profit? Probably around ₹10-12 lakh. By using Section 44AD, he declares only ₹8 lakh as taxable income. Legal, simple, and saves him about ₹60,000-₹1,20,000 in tax depending on his slab.

Plus, he doesn't need to maintain full books of accounts or get them audited. Just a simple return.

Catch: If your actual profit is lower than the presumptive rate (say your margins are really thin), you can declare a lower amount — but then you must maintain full books and get them audited. Talk to your CA.

3. Depreciation on assets

When you buy a big asset — machinery, computer, vehicle, furniture — you don't get to deduct the full cost in year one. Instead, you claim depreciation over several years.

Common depreciation rates:

Rawat ji buys a juice processing machine for ₹5,00,000. In year one, he claims 15% depreciation = ₹75,000 as an expense. In year two, 15% of the remaining ₹4,25,000 = ₹63,750. And so on.

This means ₹75,000 is subtracted from his taxable profit in year one. At a 20% tax bracket, that saves him ₹15,000 in tax — just from this one machine.

Bonus: In the first year you purchase an asset and put it to use, you can claim additional depreciation of 20% on plant and machinery used in manufacturing. So Rawat ji could claim 15% + 20% = 35% in year one — that's ₹1,75,000 off his taxable profit.

4. Keep personal and business expenses separate

This is so simple, yet so many small business owners get it wrong.

If you use one bank account for both personal and business transactions, you're making life difficult for your CA, yourself, and possibly the tax department. When everything is mixed up:

• You can't tell how much the business is actually earning
• You might claim personal expenses as business expenses (risky if audited)
• You might miss claiming legitimate business expenses
• Your books look messy, and messy books attract scrutiny

Bhandari uncle used to pay for his son's school fees, his wife's medical bills, and his shop's electricity — all from the same account. His CA spent hours untangling personal vs business transactions every year. Now he has a separate current account for the shop. Every business transaction goes through it. Every personal withdrawal is recorded as "owner's drawing." Clean, simple, audit-ready.

Open a separate current account for your business. We'll cover this in detail in the Banking chapter.

Why you need a CA from Day 1

Let's be blunt: Do not try to be your own CA.

Yes, you should understand taxes — that's why this chapter exists. But understanding taxes and doing your own taxes are two very different things. Tax law changes every year. GST rules change even more frequently. The forms, deadlines, calculations, and compliance requirements are genuinely complex.

A good CA will:

• File your income tax and GST returns correctly and on time
• Help you choose the right business structure
• Set up your books and accounting systems
• Ensure you claim every deduction you're entitled to
• Help with advance tax calculations
• Handle notices and communications from the tax department
• Advise on tax planning — legally minimizing your tax
• Keep you out of trouble

What does a CA cost?

For a small business:

• Income tax return filing: ₹3,000-₹8,000 per year
• GST return filing: ₹1,000-₹3,000 per month
• Complete tax + compliance package: ₹15,000-₹40,000 per year

This is not a cost. It's an investment. A good CA will save you multiples of their fee in tax savings and penalty avoidance.

Sharma ji charges Bhandari uncle ₹25,000 per year for complete tax handling — ITR, GST returns, TDS, and advice. Last year, Sharma ji caught a ₹1.2 lakh ITC mismatch that would have resulted in a penalty, advised Bhandari uncle to switch to the new tax regime (saving ₹18,000), and reminded him to pay advance tax on time (avoiding ₹4,000 in interest). That ₹25,000 fee saved uncle at least ₹1,40,000. Sharma ji's phone number is worth more than gold.

How to find a good CA

• Ask other business owners in your area
• Look for someone who specializes in small businesses (big firm CAs may not give you attention)
• They should be proactive about deadlines, not someone you have to chase
• They should explain things in your language, not jargon
• They should be accessible — when a notice comes, you need them to respond quickly

Common tax mistakes small businesses make

After talking to dozens of small business owners across Uttarakhand, here are the mistakes that come up again and again:

1. Not registering for GST when required. "My turnover is small" — but you're selling inter-state, or on Amazon, or your turnover just crossed the threshold and you didn't notice. Penalties stack up.

2. Mixing personal and business money. We covered this. Get a separate account. Today.

3. Not keeping receipts and invoices. If you can't prove an expense, you can't claim it. Digital photos of receipts are fine. Apps like Khatabook or a simple folder system work. Just keep them.

4. Filing returns late. Late filing fee for income tax: ₹5,000 (or ₹1,000 if income is below ₹5 lakh). For GST: ₹50 per day. For TDS: ₹200 per day. These are pure waste.

5. Not paying advance tax. The interest charges are 1% per month. On a ₹50,000 tax liability, that's ₹6,000 per year in avoidable interest.

6. Ignoring TDS obligations. You're paying rent? Paying a contractor? Paying a professional fee? Check if TDS applies. Not deducting when required means you lose the deduction for the entire expense.

7. Not reconciling GST returns. What your supplier reported and what you claimed should match. Check this quarterly. Your CA should do it, but ask them.

8. Choosing the wrong business structure for tax purposes. A partnership paying 30% when you could be a proprietorship paying 10% on the same income. Structure matters. Review it with your CA every few years as your income grows.

9. Not using Section 44AD when eligible. If you qualify, it's almost always beneficial. Don't maintain complicated books when a simpler option exists.

10. Doing taxes yourself to "save money." Bhandari uncle's neighbor tried filing his own GST returns using YouTube tutorials. He made errors in three consecutive quarters, got two notices, and eventually paid a CA ₹40,000 to fix the mess — more than twice what it would have cost to hire the CA from the start.

Putting it all together

Here's your tax checklist as a small business owner:

At the start:

• Get a PAN card (if you don't have one)
• Decide your business structure (proprietorship, partnership, company)
• Register for GST (if applicable)
• Get a TAN (if you need to deduct TDS)
• Hire a CA
• Open a separate business bank account

Every month/quarter:

• File GST returns on time (GSTR-1, GSTR-3B)
• Deposit TDS collected
• Keep all invoices and receipts organized
• Reconcile your GST ITC claims

Four times a year:

• Pay advance tax (June, September, December, March)
• File TDS returns (Form 26Q)
• Review your income and tax projections with your CA

Once a year:

• File income tax return (due date: 31st July for non-audit cases, 31st October for audit cases)
• File GST annual return (GSTR-9, due by 31st December)
• Review your business structure and tax strategy with your CA
• Get your books audited if turnover exceeds ₹1 crore (₹10 crore if 95%+ digital payments)

That GST notice Bhandari uncle got? Sharma ji resolved it in two days. The supplier had filed late, and once the filing went through, the mismatch disappeared. No penalty. No drama.

But Bhandari uncle learned something important that Thursday morning: you can't afford to be ignorant about your own taxes. You don't need to become an expert. But you need to know enough to ask the right questions, check the right things, and catch problems before they become notices.

He now reviews his GST summary with Sharma ji every quarter. It takes 20 minutes. It's the most productive 20 minutes of his quarter.

In the next chapter, we walk into State Bank with Bhandari uncle. He needs a business loan for expansion, but the branch manager is asking for documents he's never heard of. Current account, CC limit, CIBIL score — what do these mean? And why did his first loan application get rejected? Time to understand banking — the pipes through which all business money flows.