Inter company loan and advance
This query is : Resolved
25 July 2017
Can an individual proprietary firm can transfer funds between each other as per current IT as well as GST norms, note if firms owned funds from loans from family members.
26 July 2017
In case of proprietary business, funds can be transferred between the family members. If the transfer is made in the form of loan, the same has to be properly shown in the books.
26 July 2017
Whether between other proprietary firm also as temporary advance
26 July 2017
Whether between two or more proprietary firm also as temporary advance
01 August 2024
Yes, an individual proprietary firm can transfer funds between itself and another proprietary firm, as well as between other proprietary firms, subject to compliance with income tax and GST norms. Here’s a detailed breakdown:
### **1. Income Tax Norms**
- **Inter-Company Loans/Advances:**
- **Income Tax Implications:**
- **Interest on Loans:** If a proprietary firm provides a loan to another firm (including a related firm), the interest income earned is taxable in the hands of the lender firm. Conversely, the borrower firm can claim the interest paid as a business expense.
- **Documentation:** Proper documentation should be maintained for all loans and advances, including agreements and interest calculations.
- **Transfer Pricing:** For loans between related entities, transfer pricing norms may apply if the firms are considered related parties. The terms should be at arm’s length to avoid any tax issues.
- **Loans from Family Members:**
- **No Specific Restrictions:** There are generally no specific income tax restrictions on loans received from family members, provided the transactions are well-documented and reported appropriately.
- **Interest Payments:** If the firm pays interest on these loans, it should be reflected in the firm’s accounts and tax returns.
- **Temporary Advances Between Proprietary Firms:**
- **Permissible:** Temporary advances between proprietary firms are permissible. They should be appropriately documented as temporary loans or advances and should be adjusted or settled in a reasonable timeframe.
- **Reporting:** Ensure that such transactions are accurately reported in the financial statements of both firms.
### **2. GST Norms**
- **GST on Loans/Advances:**
- **Loan Transactions:** Pure loan transactions are generally not considered supply under GST and hence not subject to GST. However, if the loan is accompanied by other services (e.g., handling fees), GST may apply to those services.
- **Interest on Loans:** Interest on loans is not subject to GST.
- **Advances Between Proprietary Firms:**
- **Temporary Advances:** Transfers of funds as temporary advances do not usually trigger GST, provided these are genuinely temporary and not for the supply of goods or services.
- **Documentation:** Keep a record of the nature of the advance, including purpose, terms, and repayment schedule.
- **Invoices and GST:**
- **No GST on Pure Advances:** If no supply of goods or services is involved, no GST is applicable on pure advances.
- **Invoice Issuance:** If there is a supply involved (e.g., temporary service), an invoice should be issued in compliance with GST regulations.
### **Summary:**
- **Income Tax:** Proprietary firms can transfer funds as loans or advances. Such transactions must be properly documented and interest income/expense must be reported in tax returns.
- **GST:** Loans and temporary advances typically do not attract GST unless they are part of a taxable supply of goods or services.
### **Recommendation:**
- **Documentation:** Ensure all inter-firm transactions are documented with proper agreements and records.
- **Tax Compliance:** Consult a tax advisor for detailed compliance, especially for related party transactions and to ensure adherence to current tax and GST norms.
### **1. Income Tax Norms**
- **Inter-Company Loans/Advances:**
- **Income Tax Implications:**
- **Interest on Loans:** If a proprietary firm provides a loan to another firm (including a related firm), the interest income earned is taxable in the hands of the lender firm. Conversely, the borrower firm can claim the interest paid as a business expense.
- **Documentation:** Proper documentation should be maintained for all loans and advances, including agreements and interest calculations.
- **Transfer Pricing:** For loans between related entities, transfer pricing norms may apply if the firms are considered related parties. The terms should be at arm’s length to avoid any tax issues.
- **Loans from Family Members:**
- **No Specific Restrictions:** There are generally no specific income tax restrictions on loans received from family members, provided the transactions are well-documented and reported appropriately.
- **Interest Payments:** If the firm pays interest on these loans, it should be reflected in the firm’s accounts and tax returns.
- **Temporary Advances Between Proprietary Firms:**
- **Permissible:** Temporary advances between proprietary firms are permissible. They should be appropriately documented as temporary loans or advances and should be adjusted or settled in a reasonable timeframe.
- **Reporting:** Ensure that such transactions are accurately reported in the financial statements of both firms.
### **2. GST Norms**
- **GST on Loans/Advances:**
- **Loan Transactions:** Pure loan transactions are generally not considered supply under GST and hence not subject to GST. However, if the loan is accompanied by other services (e.g., handling fees), GST may apply to those services.
- **Interest on Loans:** Interest on loans is not subject to GST.
- **Advances Between Proprietary Firms:**
- **Temporary Advances:** Transfers of funds as temporary advances do not usually trigger GST, provided these are genuinely temporary and not for the supply of goods or services.
- **Documentation:** Keep a record of the nature of the advance, including purpose, terms, and repayment schedule.
- **Invoices and GST:**
- **No GST on Pure Advances:** If no supply of goods or services is involved, no GST is applicable on pure advances.
- **Invoice Issuance:** If there is a supply involved (e.g., temporary service), an invoice should be issued in compliance with GST regulations.
### **Summary:**
- **Income Tax:** Proprietary firms can transfer funds as loans or advances. Such transactions must be properly documented and interest income/expense must be reported in tax returns.
- **GST:** Loans and temporary advances typically do not attract GST unless they are part of a taxable supply of goods or services.
### **Recommendation:**
- **Documentation:** Ensure all inter-firm transactions are documented with proper agreements and records.
- **Tax Compliance:** Consult a tax advisor for detailed compliance, especially for related party transactions and to ensure adherence to current tax and GST norms.
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