10 May 2012
I have a business idea about stock trading.
I want to know tax and law complication on it.
Idea:
Employees will be having their Demat+ trading account on their respective pan cards. But, they will be doing trading for company and with company money. Whatever profit or loss they incur will be of company. they will be provided with fixed salary and bonus with respect to profit.
In this scene, my queries are:
1. is this legal if employees are made to pay tax on profit incur on thier pancards
2. What will be different taxes if its a small firm and if a big firm
10 May 2012
Your idea is "wonderful" for "tax payable/loss born by employees" for the company but for your surprise; it is illegal. . By the way; may I ask one query ( I presume I also have "right" to ask "unusual" query ) : . What is your qualification ?
03 August 2024
Your business idea involves a unique approach to stock trading, where employees trade using their personal accounts, but the profits and losses are attributed to the company. This arrangement raises several legal and tax-related issues. Here’s a breakdown of your queries and some suggestions:
### 1. **Legality and Tax Implications**
**Legal Considerations:**
- **Personal Demat and Trading Accounts:** Generally, stock trading should be conducted through accounts that are registered in the name of the entity that is conducting the trading activities. This ensures that profits and losses are correctly attributed to the entity and not to individual employees. Using personal accounts for company trading can lead to legal complications, including issues of tax evasion or misreporting.
- **Contracts and Agreements:** While you can have agreements with employees regarding the allocation of profits and losses, the legal and tax framework must still be adhered to. The primary concern is that the tax authorities may view this arrangement as a means to evade tax or improperly account for income and expenses.
**Tax Implications:**
- **Employee Tax Liability:** If employees are trading on behalf of the company but using their personal accounts, the profits may be considered as personal income. Employees would then be liable to pay tax on these profits as individuals, even though the trading activity is for the company's benefit. This creates complications in terms of tax reporting and compliance.
- **Company Tax Liability:** The company’s profits and losses should be reflected accurately in its financial statements. If profits are generated through trading activities, they should be recorded under the company’s PAN and the relevant taxes should be paid by the company. The company must file its tax returns reflecting these profits and losses.
### 2. **Tax Differences for Small vs. Big Firms**
- **Small Firms:** If a small firm engages in trading activities, it must comply with the same tax laws as larger firms. However, the scale of operations might affect reporting requirements and the complexity of tax calculations. Smaller firms may face fewer regulatory hurdles but still need to adhere to tax compliance.
- **Big Firms:** Larger firms might have more complex trading activities and regulatory requirements. They would need to maintain detailed records and possibly face more scrutiny from tax authorities. The tax rates and compliance costs may be higher, and larger firms often have more robust accounting and legal teams to manage these aspects.
### Legal and Practical Recommendations
1. **Open Company Accounts:** Ideally, the trading accounts should be in the company’s name, not in the employees' names. This would ensure that all profits and losses are directly attributed to the company, simplifying tax reporting and compliance.
2. **Consult Legal and Tax Professionals:** Engage with a tax advisor and legal expert to review your business structure and ensure compliance with relevant regulations. They can provide advice on structuring your business in a way that adheres to tax laws and avoids legal complications.
3. **Draft Clear Contracts:** If you proceed with the current model, ensure that you have clear contracts and agreements with employees that outline their role and compensation. However, be aware that these agreements might not change the fundamental tax and legal obligations.
4. **Tax Compliance:** Ensure that all trading activities are properly recorded and reported. Both the company and employees must comply with their respective tax obligations to avoid issues with tax authorities.
5. **Explore Alternative Structures:** Consider alternative business structures or trading models that align with regulatory requirements and streamline tax compliance. For example, setting up a trading company with appropriate licenses and accounts.
### Summary
- **Legality:** The use of personal trading accounts for company business can lead to significant legal and tax complications. - **Tax Implications:** Employees could be taxed personally on trading profits, which complicates the tax situation. - **Recommendations:** Open trading accounts in the company's name, seek professional advice, and ensure compliance with all tax regulations.
This approach will help mitigate risks and ensure that both legal and tax obligations are met.
CAclubindia
