Suppose an established proprietorship firm with a larger turnover (eg two cr) performs export of services. Now they want to move to domestic pvt ltd structure. One of the reasons is the need for a stronger identity to secure potential future funding, and it will also reduce the tax to 25% using 115BAA.
Is converting proprietorship to a Pvt. Ltd (transferring assets and liabilities) must, or they can simply stop (proprietorship) and start a private limited company? They would prefer a stop-and-start approach.
I heard that income tax might create problems related to GAAR if the proprietorship suddenly stops receiving any income and all new income goes to the newly created pvt ltd company. Is it true or won’t be an issue?
If you want to convert your proprietorship firm to a private limited company, it allows certain taxation benefits,
The transfer from proprietorship to company is not taxable, if conditions of section 47(iv) is satisfied. And you don’t have to pay any taxes on such conversion.
Regarding GAAR, there is no invocation of GAAR in this conversion case, as it is a tax planning, not a tax evasion or a tax avoidance. GAAR is invoked in case of tax avoidance and or tax evasion. So you don’t have to be worry about the GAAR.
Converting a proprietorship to a Pvt Ltd company allows business continuity with better credibility and limited liability.
Stopping and starting fresh means losing past business identity but offers a clean legal and financial slate.
You’re not required to convert the proprietorship into a private limited company rather you can close the proprietorship and start a new company instead. Many businesses prefer this approach as it’s simpler to execute.
If you wish to transfer all assets and liabilities without triggering capital gains tax, you can opt for a tax-neutral conversion under Section 47(xiv), subject to certain conditions.
As for GAAR, it generally won’t apply if the change has a valid commercial purpose such as establishing a stronger corporate structure, attracting investment, or limiting liability and not solely to avoid taxes. As long as the proprietorship is properly closed and the new company operates independently, the transition should remain compliant and low-risk.