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Four reasons why startups should e-file their tax returns

Saurin Parikh
27th Jun 2016
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Startups are fun. The adrenaline rush that comes with building a product, service or business is incomparable to anything else in the world. To be a part of a culture that is heralding a newer, bolder India is, by itself, something to be proud of. Startups are not only changing the way business is done in India but, also, the way work is done. Indian millennials have long waited for a work culture that allows them to have the freedom to creatively express themselves without any hang-ups of the past. It is no wonder then that more and more people want to work for startups.

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However, running a startup isn’t all hunky-dory. If you’re a startup entrepreneur, you have probably compromised your social life for long hours at the office. It takes effort to build a startup but, by and large, it is a lot fun. Except, maybe, when it comes to taxation.

While taxation is one aspect of running a startup that entrepreneurs tend to shy away from, it goes without saying that a business cannot afford to ignore their taxes. In fact, filing tax returns is an integral part in helping your startup grow. This is true primarily to startups that are registered as partnership firms, limited liability partnerships (LLP) or private limited companies. If your startup is a sole proprietorship, then you will need to e-file the income tax returns as an individual. In this case, you can also use the Rs 2.5 lakh exemption limit available to individual taxpayers. For other kinds of startups, there is no exemption limit. They would have to pay income tax on any income that is earned.

Here are four reasons why all startups should e-file their income tax returns.

To offset losses

The first few years of a startup are always a warm-up period. It is never easy to start making profits right away. Any new business has to see a couple of years of losses before they see an uptick in the profits section of their balance sheet. The good news is that these losses can be offset against profits in the coming years; however, to do so, the startup needs to e-file their income tax returns with the losses to be able to offset them later.

To apply for loans

Just as is the case with individual taxpayers, a startup is also required to submit their income tax returns at the time of applying for loans. Tax returns are the best proof of a company’s existence and operations, which is why they’re required in case a loan is required. Financial institutions that help startups with loans always ask for the previous years’ income tax returns.

To receive funding

Funding is an important way for a startup to raise capital. There are angel investors, venture capitalists and other sources that startups usually approach to raise funds. These investors would require the startup’s previous years’ tax returns to understand the company’s book value and decide how much funding it can or should be given. This again makes filing income tax returns important for a startup.

To resolve disputes

Wherever there is a business, disputes can’t be far away. Often, the founders of a startup end-up having differences of opinions or they just might want to part ways amicably. In either case, or to solve any other dispute with external parties like investors, the startup may need to refer to their income tax returns to solve money-related issues in the dispute.

The above are four compelling reasons why startups should file income tax returns. It’s not something that has to be done too often and the benefits are many.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)

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