Suggestion for New Pharma Business Startup
I am residing in Bangalore, working in a Private company from past 8 Years. My friend has Drug Lisense and started a Wholesale Pharmaceutical business 2 Years back in the state of ASSAM. I was the one who has helped him streamline his business by introducing him to few Pharmaceutical companies in NCR and Chandigarh. But, due to lack of proper planning he is unable to run it smoothly.
He has asked my help,and wants me to get involved in Pharma business with him. He wants me to buy products from companies in Bangalore and deliver it to him in ASSAM. He also assured that he is fine with me keeping my profit share out of it.
Experts, I am confused and need your suggestion with following questions :
1. Should I ask companies in Bangalore to send him the consigment directly and collect amount from me ?
2. Should I ask my friend to buy it from me ? In that case what challanges I would face ? I need TIN as it would be interstate sale.
3. As he approved me of sharing profit out of it, what would be a proper way so that he may receive products what he has ordered from the pharma company and I can keep my profit out of it.
Mods: If this is not the correct category, request you to classify accordingly.
Thanks in Advance.
Hi Welcome on Tikshare.
Going through your details here is my opinion.
Firstly you are working in a private limited company. If you start business on your name and continue with your employement, your company may have issues with it. If your employement contract abstrains you from conducting business on your name and directly compete with its own business, it may sue you for damages. You can refer my take on Indian Contract Act. Before starting business on your own name first refer to your employement contract if you are planning to conduct business along with your ongoing employement.
Coming to your questions here are the options:
Taking VAT registration on your name and trading
You said, you helped your friend connnect with pharmaceutical companies and seems you have great knowledge of this business. This seems to be a good option.
You can take vat registration on your name and start doing the trading business. You are not clear whether you are interested into doing business on your name or only sharing the profits.
If you are interested only in sharing profits, you can jump to second option.
However the impact of you taking VAT registration and conducting business on your name on profits will be as follow:
Suppose your buy medicines for 100 Rs. including VAT, you will sell to your friend after charing CST of 2% on sale value which includes your profits too.
You will be charing CST on profits too, suppose you sell to your friend for 110 Rs. and charge CST on entire 110. In this case you are charging CST on 10 Rs. also.
In case your friend directly buys from companies CST of 2% will be charged only on 100 Rs.
However, you can take VAT input of tax charged by company selling you medicines.
Charging commission to your friend instead of taking VAT registration
In this case you can charge a commission to your friend. It will not be even against your employement contract too, as you will be providing only consultancy services.
However even in this case if your total commission cross 9 Lakhs in a year you have to take Service tax Registration and Service tax rate is 14.5% inluding Swachh Bharat Cess.
The tax cost will increase by 14.5% instead of 2% (CST).
Your friend opens a branch in Bangalore, purchase locally and transfer the stock to Assam
This is another option, your friend can open a branch in Bangalore, can buy locally and transfer the stock to Assam. Though this option looks good since CST is not chargeable on stock transfers.
But however VAT input will not be available for stock transfers.
By going through all the options, you taking VAT registration in Bangalore looks perfect if we consider the tax costs. However if you are still on planning stage and by the time you decide if GST is implemented in India, you can choose any option and tax implication will be same.
Thanks a ton Mr. Sharma.
Yes. You are correct. Before, I start business with my name, I would resign from my existing job.
As far as your valuable suggestion goes, I am also with you on the second option you suggested. Considering, business transaction would not cross 9 Lakhs in a year at this juncture, what is the procedure of rendering consultancy services to my friend ? Do I need any paper works ? Sir, Kindly let me know if I need to follow any standard procedure to charge commission to my friend ?
I am unclear, if I should purchase the items and ship it to his address or rather tell the company to ship it directly to his address ? In that case, how the commission would be added to my Kitty and how the invoicing part would be done.
I am sure, these valuable guidance would help me get a clear picture.
Thanks in Advance
In second option where you charge commission, seller will directly bill to your friend charging CST 2%. You will charge commission to your friend.
There is no procedure for individuals, just raise bill every month for the commission amount and your friend should pay the commission amount either after deducting TDS if applicable.