Where most of the businesses start as a proprietorship firm, one can always change the business structure by exploring the benefits of partnership by adding a partner. Especially when the operations reach certain esteemed levels, a partner may be required to increase the efficiency and act as a catalyst for the faster growth of the present business.
For conversion from an unorganized business structure to a partnership firm, the business is likely to pass through procedural requirements. Once the business is converted to the partnership, all the assets, liabilities and rights accompanied to proprietorship will be passed on to the partnership firm; subject to the consent of partners.
The following are the steps:
1. Drafting of Partnership Deed and getting it registered:
The first step is to draft of the firm’s partnership deed. This will lay down the framework of the business and the relationship between the partners. The deed must include the partnership starting or induction date. i.e, partners induction details.
2. Get PAN for the firm
3. Get GSTIN for the firm
4. Declaration of Transfer under Income tax act for transfer of all the assets of the business to the partnership firm:
The deed for declaring transfer is different from a regular partnership deed. It will make several references to the proprietorship business and will declare the transfer to a partnership firm.
There are a few mandatory inclusions in deeds such as date of sole proprietorship formation, proprietor’s name, business type and other details, like Service Tax registration and VAT. In this case, the TIN and Service Tax number must be disclosed.
5. Filing GSTR returns for transfer of ITC and assets:
While submitting the cancellation for GST registration of proprietorship, the taxpayer has to give the date from which the registration is to be cancelled. Also, while applying for new GST registration of the partnership firm, the taxpayer has to submit the date on which liability to register arises. The taxpayer has to make sure that both the above dates are the same, and this will be the effective date for GST registration of partnership.
Therefore, the proprietorship entity has to file all GST returns till the new GST registration date is announced. The partnership firm has to start filing the GST returns from the date of new GST registration.
The transfer of stock or other assets while converting an existing proprietorship entity into a new partnership firm is exempted under GST, because such goods/assets are transferred for the continuance of the same business.
After completing the filing of the pending returns, the taxpayer can transfer the unutilized ITC to the partnership firm. Following are the steps for transferring unutilized ITC to the partnership firm:
Form GST ITC-02 has to be filed by the proprietorship business to transfer the unutilized ITC to the electronic credit ledger of the partnership firm.
Proprietorship entity shall also file a copy of a certificate issued by a practicing Chartered Accountant or Cost Accountant certifying that the business has been transferred with a specific provision for the transfer of liabilities.
The partnership shall accept the information so provided by the proprietorship company on the GST portal and, upon such approval, the unutilized ITC specified in Form GST ITC-02 shall be credited to its electronic credit ledger.
The inputs and capital goods, thus transferred, shall be adequately accounted for in its books of account by the partnership firm.
There is no provision under the GST Act to transfer balance in electronic cash ledger from one entity to another entity. Hence, the taxpayer has to file the Form RFD-01 with a refund type of either “Refund of Excess Balance in Electronic Cash Ledger” or “Refund on Account of Any Other Reasons” to get the refund of balance in electronic cash ledger.
Once the pending returns were filed, and all tax dues have been paid off, request for the cancellation of the GST registration in Form GST REG 16 citing reasons as ‘Changing the company’s legal framework’. It will also ask for the new partnership firm’s GST number.
Note: The above is only a brief outline of the entire process of conversion of proprietorship to partnership. One should know that, the decision of conversion should be taken only based upon properly maintained data and records . This involves huge cost of consultancy and should be done with thorough planning.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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