Anyone looking to start a business primarily thinks about how to open current account without GST registration for their business. This concern often overshadows other aspects of setting up the business, as many are unsure of the requirements and feel pressured by bank policies that demand GST registration, even when it’s not legally necessary for them.
Opening a Current Account without a GST registration is possible for proprietorship firms under specific circumstances. For many sole proprietors, especially those with lower turnovers, GST registration is not mandatory. This can simplify the process of opening a Current Account.
Let’s explore the requirements and procedures for opening a Current Account for a proprietorship firm without GST.
Benefits of Opening a Current Account for Proprietorship Firm
A Current Account is a type of bank account primarily used by businesses, companies, and professionals who deal with frequent transactions. Unlike a savings account, a current account allows for an unlimited number of deposits and withdrawals, making it ideal for daily business operations. Having a Current Account provides numerous benefits for sole proprietors, including:
- Professional Image: Operating with a Current Account lends credibility to your business, making it easier to work with vendors, clients, and other stakeholders.
- Ease of Transactions: Current Accounts are designed to facilitate a higher volume of transactions without limits, making them ideal for business purposes.
- Separation of Personal and Business Finances: A separate Current Account helps manage your business finances more effectively, ensuring that your personal and business funds are not intermingled.
- Overdraft facility: Many banks offer an overdraft facility, allowing the account holder to withdraw more money than is currently available in the account, up to a certain limit.
- No interest: Unlike savings accounts, current accounts typically do not earn interest on the balance.
- Higher minimum balance: Current accounts usually require a higher minimum balance compared to savings accounts.
- Multi-city cheques and demand drafts: These accounts offer features like multi-city cheques and easy transfer of funds across branches.
Current accounts are essential for businesses to manage their financial operations efficiently.
Common Scenarios Faced by Everyone When Opening a Current Account
When someone wants to start a business, the first step they often consider is opening a current account. Many believe that having a current account is a prerequisite for running their business, as clients prefer to make payments via cheque or online bank transfer.
However, when a person approaches any bank, whether public or private, to open a current account, they are often told that the account will only be opened if they provide a GST registration number in their business name. Even if the individual explains that they are just starting their business, the bank staff usually insist on GST registration as a mandatory requirement before opening the account, stating that, as per RBI guidelines, the account cannot be opened without GST registration.
According to GST laws, registration is mandatory only if a business exceeds certain turnover thresholds—₹40 lakh for goods, ₹20 lakh for services, and ₹10 lakh for special category states. Despite this, many banks demand GST registration even when the business hasn’t yet commenced operations or doesn’t meet the legal turnover requirements for registration.
Is GST Registration Mandatory for Business and Current Account?
In reality, GST registration is often unnecessary during the early stages of a business, especially if the individual does not yet meet the turnover criteria. However, banks continue to enforce GST requirement, pressuring prospective business owners to register for GST prematurely. As a result, many entrepreneurs find themselves entangled in the complexities of GST compliance before they have even started earning revenue.
This premature registration often forces individuals to incur additional costs for fulfilling GST compliance requirements, even though their businesses are not yet operational. Many are unaware of the complexities involved in GST compliance, leading to missed filings and notices from tax authorities. This, in turn, forces them to seek assistance from GST professionals, like lawyers or chartered accountants, to manage the compliance process. Over time, the individual realizes they were unnecessarily pressured into GST registration by the bank, causing avoidable legal and financial complications.
This issue highlights a significant problem in the banking system. Many people who are not required by law to register for GST are being compelled to do so just to open a bank account, leading to additional compliance burdens. This creates unnecessary financial and legal challenges for small business owners, adding to their stress and expenses.
When is GST Not Required?
Businesses that fall under this threshold are not obligated to apply for GST, making the process of opening a Current Account easier. If you are a sole proprietor with a business turnover of less than ₹40 lakhs (for goods) and ₹20 lakhs (for services), you are exempt from the requirement to register under GST. This exemption allows proprietors to open a Current Account even without having a GST registration number.
Certain individuals and businesses are exempt from GST registration, including:
- Agriculturists (Also read – GST Exemption for Farmers)
- Sole proprietors with an annual turnover of less than ₹40 lakhs for the sale of goods and ₹20 lakhs for services (₹20 lakhs and ₹10 lakhs for specified categories).
RBI Guidelines for Proprietorship Firm’s Current Account
To address this, the Reserve Bank of India (RBI) has issued Master Circular Guidelines, clearly stating that banks are not required to demand specific documents, such as GST registration, for opening current accounts for proprietorship firms. The RBI’s guidelines offer flexibility, allowing banks to open accounts with just basic documents like identity proof, address proof and one document in business name as business activity proof. Despite this, many banks ignore the RBI’s instructions and continue to insist on GST registration, creating barriers for individuals seeking to start a business.
In response to complaints, Reserve Bank of India (RBI) has issued specific guidelines that simplify the process of opening a Current Account for sole proprietors, advising banks not to pressure new business owners into unnecessary registrations. The notification clarifies that banks should allow account openings with one document for business activity proof. According to notification, the banks have the discretion to accept only one document as proof of business activity if the proprietor faces genuine difficulty in providing two. In such cases, banks are required to perform additional verification, such as a contact point verification, to ensure the legitimacy of the firm.
The RBI via Notification No. RBI/2014-15/498 dated March 15, 2015, for ‘Know Your Customer (KYC) guidelines – accounts of proprietary concerns’ issued the guidelines by relaxing the documents required for opening a bank account states that:
“Reserve Bank has been receiving representations pointing out difficulties in complying with the requirement of furnishing two documents as activity proof while opening accounts of sole proprietary firms in certain cases. It is possible that in some types of activities there is genuine difficulty in procuring two such documents. The matter has, therefore, been reviewed with a view to ease the process of opening bank accounts of proprietary concerns in such cases.
The default rule is that any two documents, out of those listed in paragraph 2.5 (h) of the Master Circular, should be provided as activity proof by a proprietary concern. However, in cases where the banks are satisfied that it is not possible to furnish two such documents, they would have the discretion to accept only one of those documents as activity proof. In such cases, the banks, however, would have to undertake contact point verification, collect such information as would be required to establish the existence of such firm, confirm, clarify and satisfy themselves that the business activity has been verified from the address of the proprietary concern.”
“It is also clarified here that the list of registering authorities indicated in paragraph 2.5 (h) of the Master circular is only illustrative and therefore includes license/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute, as one of the documents to prove the activity of the proprietary concern.”
Despite this, many banks continue to disregard the RBI’s circular and insist on a GST number as a prerequisite for opening current accounts. This practice creates significant difficulties for individuals who are not even liable to register for GST, forcing them to comply with unnecessary legal and financial burdens just to gain access to basic banking services.
Most people are unaware of these RBI guidelines and tend to trust whatever the bank representatives tell them. If individuals were more aware of the RBI’s flexibility, they could avoid this compliance burden, but instead, they follow the bank’s instructions, believing it to be the only way to open their account.
How to Open Current Account without GST Registration for Proprietorship Firm?
Establishing a proprietorship firm is relatively simple, which makes it the preferred choice for many aspiring entrepreneurs. If you are a sole proprietor with a business turnover of less than ₹40 lakhs (for goods) and ₹20 lakhs (for services), you are exempt from the requirement to register under GST. This exemption allows you to open a Current Account even without having a GST registration number.
When opening a Current Account for a proprietorship firm, certain documents must be submitted to the bank. According to RBI guidelines, banks have some flexibility in terms of the documents required, but the following are typically necessary:
Documents Required for Opening a Current Account for a Sole Proprietorship:
- Proof of Business Name and Activity: Usual two documents in the name of the proprietorship firm, confirming both the name and address. These can include registration certificates or licenses issued by government authorities. However, in cases where it’s challenging to furnish two documents, banks may accept just one, provided they are satisfied with the verification process.
- Photograph of the Proprietor: A recent passport-sized color photograph of the sole proprietor.
- Permanent Account Number (PAN Card): The PAN card of the sole proprietor is mandatory.
- Identity and Address Proof of the Proprietor: This can be any government-issued identity and address proof such as an Aadhaar card, voter ID, or passport.
- In Case of Power of Attorney (POA): If a Power of Attorney has been granted to another person for operating the account, the photograph and identity and address proof of the POA holder are required.
- Account Opening Cheque: A cheque from an existing Current Account is often required for account verification, however it is not mandatory.
- Any Additional Documents: Banks may accept other identity, address, or entity documents as per their satisfaction, following RBI guidelines.
Additional Considerations: KYC Compliance
All documents provided for opening the account must comply with the Know Your Customer (KYC) guidelines set forth by the RBI. The bank will only accept valid documents, ensuring that they meet the required standards for verification and compliance.
Conclusion
Opening a Current Account without GST for a proprietorship firm is feasible if your business turnover is below the GST threshold. By providing the necessary documents and adhering to RBI guidelines, sole proprietors can easily open a Current Account and enjoy the benefits of streamlined business operations. Be sure to consult with a lawyer if the bank representative insist for GST Registration to open a current account.
If you’re a sole proprietor looking to open a Current Account without GST, understanding the process, ensuring you have the necessary documentation, and consulting with a lawyer can make the process smoother and hassle-free.
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