What is Annual Compliance for a Partnership Firm?

Annual compliance for a partnership firm involves fulfilling various legal and financial obligations required by Indian laws to ensure the firm’s smooth operation and regulatory adherence. The key compliance tasks include:

• Filing the firm’s income tax return (using Form ITR-5)

• Filing income tax returns for individual partners

• Maintaining proper books of accounts

• Complying with Goods and Services Tax (GST) rules and filing periodic GST returns, if applicable

• Undergoing a tax audit by a Chartered Accountant if the turnover exceeds prescribed thresholds

• Following Employee Provident Fund (EPF) and Employee State Insurance (ESI) regulations, if the firm has employees

These measures help avoid penalties, maintain the firm’s legal status, and ensure financial transparency.

Benefits of Compliance for Partnership Firms

1. Transparency
   Maintaining accurate financial records fosters transparency, building trust with partners, creditors, investors, and stakeholders.

2. Good Governance
   Compliance promotes ethical and responsible management of the firm’s affairs in line with partners’ interests.

3. Credibility
   A compliant firm gains greater credibility with banks, suppliers, customers, and government bodies, enhancing reputation.

4. Risk Mitigation
   Regular compliance helps identify and mitigate legal and financial risks before they escalate.

5. Access to Funding
   Investors and lenders prefer firms with a strong compliance track record, easing access to capital.

6. Business Continuity
   Compliance reduces risks of legal disputes and regulatory penalties, ensuring uninterrupted operations.

Annual Compliance Requirements for a Partnership Firm

1. Income Tax Return Filing

Filing Form ITR-5 by the due date to report income and tax liability. The deadline depends on whether a tax audit applies.

2. GST Return Filing (If Applicable)

Registered firms must file GST returns (monthly or quarterly) including:

• GSTR-1 for outward supplies

• GSTR-3B for summary of supplies and tax payments

3. TDS Return Filing

Firms deducting TDS on payments like salaries or professional fees must file quarterly TDS returns (e.g., Forms 24Q and 26Q) reporting the deductions.

4. Tax Audit

Mandatory for firms with turnover exceeding ₹1 crore (with certain exceptions). A Chartered Accountant conducts the audit, and the report (Form 3CD) is filed alongside the income tax return.

5. Maintaining Financial Records

Books of accounts including ledgers, vouchers, invoices, and bank statements must be maintained accurately to support filings and audits.

6. EPF/ESI Compliance (If Applicable)

If the firm has employees meeting statutory thresholds, it must comply with EPF and ESI regulations, including registration, contributions, and return filings.

Documents Required for Partnership Firm Compliance

• Partnership Deed: Legal agreement outlining partnership terms

• PAN Card of the Firm: For tax identification and filings

• PAN Card & Address Proof of Partners: For individual identification and verification

• GST Registration Certificate: If GST applies

• Bank Account Statements: For financial record verification

• Financial Statements: Balance Sheet and Profit & Loss Account

• TAN (Tax Deduction and Collection Account Number): If deducting TDS/TCS

Key Partnership Compliance Due Dates 2024-25 (Assessment Year 2025-26)

Process of Filing Annual Return for a Partnership Firm

1. Review Compliance Requirements
   Understand all applicable statutory filings: Income Tax (ITR-5), GST returns (if applicable), EPF/ESI returns (if applicable), Professional Tax, and Registrar of Firms intimations.

2. Gather Documents
   Collect key documents such as Partnership Deed, PAN cards of firm and partners, bank statements, invoices, expense vouchers, salary data, and TDS/EPF/ESI/GST records.

3. Prepare Financial Statements
   Draft Profit & Loss Account and Balance Sheet for the financial year (April 1 – March 31) showing income, expenses, and financial position.

4. File Income Tax Return
   File ITR-5 accurately reporting income and partner remuneration. Conduct tax audit if turnover exceeds thresholds.

5. File GST Returns
   Submit monthly/quarterly GSTR-1 and GSTR-3B, plus annual GSTR-9 if applicable.

6. File Other Statutory Returns
   Complete filings related to EPF, ESI, TDS, and make corresponding payments.

7. Review & Verify
   Ensure all filings are complete, accurate, and timely to comply with applicable laws: Indian Partnership Act, Income Tax Act, GST Act, and others.

Income Tax Return (ITR) Filing for Partnership Firms

• Partnership firms must file ITR-5 every year, regardless of income or activity, including loss-making or inactive firms.

• Firms are taxed at a flat 30% rate on total income.

• Additional levies include:

  • Surcharge: 12% if total income exceeds ₹1 crore.

  • Health & Education Cess: 4% on income tax plus surcharge.

Example Tax Calculation

Filing even without Business Activity

• Filing ITR is mandatory even if no business activity or losses occurred.

• Filing preserves the right to carry forward losses for set-off against future profits.

• Non-filing attracts penalties under Section 234F and loss of benefits.

Goods and Services Tax (GST) for Partnership Firms

GST is a unified indirect tax system that simplifies tax compliance across India. For partnership firms, understanding GST compliance is essential to operate smoothly, manage transactions efficiently, and legally claim input tax credits.

When is GST Registration Mandatory?

• Turnover Threshold:

  • Goods: ₹40 lakhs (₹20 lakhs for special category states).

  • Services: ₹20 lakhs (₹10 lakhs for special category states).

• Inter-State Supply: Mandatory registration regardless of turnover.

• Casual Taxable Persons: Firms supplying in states without fixed business locations.

• Reverse Charge Mechanism (RCM): If liable to pay GST under RCM.

• E-commerce Operators: Firms supplying through e-commerce platforms.

• Input Service Distributor (ISD): If distributing input services tax credits.

• Voluntary Registration: Firms below thresholds may register voluntarily to claim ITC and enhance credibility.

Tax Deducted at Source (TDS) Compliance for Partnership Firms

Partnership firms must deduct TDS on various payments under the Income Tax Act, such as salaries, rent, professional fees, commissions, interest, and contractor payments.

New Important Provision: Section 194T (Effective April 1, 2025)

• Requires 10% TDS on payments to partners (salary, commission, interest, etc.) exceeding ₹20,000 annually.

TDS Deduction and Filing Guidelines

• Deduct TDS: At the earlier of credit to payee’s account or actual payment.

• Deposit TDS: By 7th of the next month (April payments due by April 30).

• Quarterly TDS Returns:

  • Form 24Q: TDS on salaries.

  • Form 26Q: TDS on non-salaries.

  • Form 27Q: TDS on payments to non-residents.

• Due Dates for TDS Returns:

  • Q1: July 31

  • Q2: October 31

  • Q3: January 31

  • Q4: May 31

• Issue TDS Certificates: Form 16 (salaries) or Form 16A (non-salary) within 15 days after filing returns.

EPF and ESI Compliance for Partnership Firms

Employee Provident Fund (EPF)

• Applicability: Firms with 20+ employees (voluntary registration allowed for fewer employees).

• Contribution:

  • Employer: 12% of basic wages + DA (split between EPF & EPS).

  • Employee: 12% of basic wages + DA.

• Due Dates:

  • Payment by 15th of next month.

  • ECR (Electronic Challan cum Return) filing by 25th monthly.

• Documents Needed: EPFO login, DSC, employee details, salary info, KYC, etc.

Employee State Insurance (ESI)

• Applicability: Firms with 10+ employees earning ≤ ₹21,000/month (₹25,000 for disabled).

• Contribution:

  • Employer: 3.25% of gross wages.

  • Employee: 0.75% of gross wages.

• Due Dates:

  • Payment by 15th of next month.

  • Half-yearly returns (Form 5) due Nov 11 (Apr-Sep) and May 12 (Oct-Mar).

• Documents Needed: ESIC login, DSC, employee & wage details, attendance, payment challans.

Maintaining Proper Books of Accounts

Partnership firms must maintain accurate books of accounts to ensure:

• Legal compliance (Income Tax, GST, etc.)

• Efficient financial management

• Smooth tax assessments and audits

Event-Based Compliance for Partnership Firms

Changes in Partners

• Requires mutual consent and a supplementary partnership deed.

• Update KYC documents for new partners.

• Notify Registrar of Firms (RoF) or Registrar of Companies (RoC) for LLPs.

• Update PAN, GST registration, bank accounts accordingly.

Change in Business Name or Address

• Requires partner approval and supplementary deed.

• Submit proofs (address, identity).

• File changes with RoF/RoC and update PAN, GST, licenses, bank accounts.

Annual Compliance Costs for Partnership Firms in India

Factors Influencing Costs

• Scale and complexity of business

• Industry-specific regulations

• Number of employees and related filings

• Mandatory tax audit requirements

• Professional fees and location

• Timeliness of filings

Estimated Cost Ranges