How much Tax you can save by forming a new Company or LLP or Partnership post-October 2019

How much Tax you can save by forming a new Company or LLP or Partnership post-October 2019

How much Tax you can save by forming a new Company or LLP or Partnership post-October 2019

The government recently had made an announcement relating to slashing of corporate tax rate which would help in reviving the corporate sentiments, by providing impetus towards corporations to start CAPEX plan, improve compliance as well as give India a competitive slot in the middle of leading economies of the world.

The Finance Minister Nirmala Sitharaman has announced a slew of measures in the direction of boosting the economy. The current major announcement made in September 2019, was about a corporate tax rate cut, which would give a boost to investment as well as a manufacturing activity.

However, if anyone wants to start a fresh business, then that person is required to follow few options so as to start with a company or Limited Liability Partnership (LLP) or Partnership Firm or Sole Proprietorship.

The above-mentioned company structures have their own advantages as well as disadvantages reliant upon the type of business, a number of proprietors, location and control. Let’s see some tax benefit and liability on each entity.

ParticularsCompany (Manufacturing)Company(Others)LLP/PartnershipSole Proprietorship (Max Tax)
Corporate Tax Rate15%22%30%30%
Surcharge on Tax + Cess10% + 4%10% + 4 %12 % + 4%37 % + 4 %
Effective Tax Rate17 %25.17 %34.94 %42.74 %
Dividend Distribution Tax(DDT)17.16 %17.16 %NANA
Tax on Dividend in hands of Individual14.25 %14.25%NANA


For Business Earning Profit of 100 Lakhs    
Profit before Tax100100100100
Income Tax17.1625.1734.9642.74
Profit after Tax82.8474.8365.0657.26
Approx. Calculation of DDT and Tax on Dividend in hands-on Shareholders2422NANA
Cash Balance in Hands58.8452.8365.0657.26
Effective Tax Rate 41.1647.1734.9442.74
Cost of Formation of Entity in Rs. 100035352515
Cost of Maintenance (Turnover 100 Crore)7 Lakhs7 Lakhs 5 Lakhs 4 Lakhs

Thus, if we equate all the tax outgo which has been taken at the maximum marginal rate, LLP appears towards being one of the best options. However, in LLP, there is a restraint on salary, interest or payment received by a partner was considered as tax-free. Furthermore, in case a corporation or shareholder wants to ignore paying dividends as well as also wishes to plow back the investment in the same corporation then business model functions well as there won’t be any dividend distribution tax as we tax on individuals receiving dividends.

Therefore, the nature of commerce, location, the numeral of investors and partners would decide on the form of entity to be formed. 

Few of the key announcements made by FM relating to slashing corporate tax are;

The government had proposed to slash the corporate tax rate for domestic tax rate. Ordinance concerning this has already been passed.

•    A domestic corporation could pay income tax at 22% if they do not seek any exemption or incentives

•    Effective Tax Rate 25.17% inclusive of every surcharges and cess for such domestic corporations

•    Such corporations also do not require to pay Minimum Alternative Tax

•    Corporations availing exemptions could opt to pay a tax of 22% after the exemption period is over

•    The enhanced surcharge has been announced in Budget shall not be applicable on capital gains arising on sale of any securities which includes derivatives in the hands of foreign portfolio investors

•    The government expects towards widening tax basket with a lower tax rate

•    Buybacks pre-July 5 has been exempted from buyback tax

•    For new manufacturing corporations that start production before March 2023 and incorporated on or after 1st October 2019, the corporate tax rate has been brought down to 15% from 25%

•    The enhanced surcharge was announced in Budget which is not to apply on capital gains arising on sale of equity share in a corporation or a unit of equity-oriented finance or a unit of a business trust accountable for STT

•    Minimum Alternate Tax or MAT for corporations that want to use tax exemptions cut to 15% from 18.5%

•    The new tax rate shall be applicable from the current fiscal which began on 1st April.

•    Corporations could opt for lower tax rate after the expiry of tax holidays as well as concessions that they are availing now.

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eStartIndia Team

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