tax benefits to MSME
tax benefits to MSME

Tax Benefits to MSMEs

Micro, Small and Medium Enterprises (MSMEs) play a crucial role in Indian economy by contributing around 30% to the GDP. In order to ensure that MSME operations are duly supported, many direct and indirect tax benefits are provided with the focus of increasing their contribution to GDP from 30% to 50%.
Let’s discuss some of the tax benefits which are in place:

Direct Tax Benefits to MSMEs

The MSMEs which are incorporated as companies can opt for any of the following concessional tax to reduce their tax liability:

Section 115BAA: The effective tax rate is 25.17% for a company incorporated in India (22%+10% surcharge+4% cess). However, various deductions and exemptions like additional depreciation, expensing off capital expenditure, SEZ benefits, etc. need to be foregone. Further, once a company chooses taxation under this section, it cannot be changed or withdrawn afterwards. The company needs to opt this option by filing Form 10-IC on or before due date of filing Income Tax return.

Section 115BAB: If the company is established after 1st October 2019 and manufacturing started before 31st March 2024, it can opt for getting taxed at 15% (10% surcharge and 4% cess extra) with effective tax rate of 17.16% without taking benefit of any deductions or exemptions like SEZ benefit, Chapter VI-A, etc. Form 10-ID needs to be filed on or before the due date of filing ITR to take this benefit of lower tax rate.

Example: A company got established and started manufacturing in FY 2020-21. It can opt for getting taxed effectively at 17.16% by filing Form 10-ID on or before 30th September 2021.

Section 80IAC: If the company/ LLP is registered as a startup with DPIIT, the startup can avail tax holiday for 3 consecutive financial years out of its first ten years since incorporation. The annual turnover of the company/LLP should not exceed Rs.100 Cr.
Example: A startup incorporated in FY 2020-21 can avail 100% tax incentive for any three consecutive years out of its first 10 years. It needs to get registered as a startup with DPIIT.

The MSMEs which are not incorporated as company are provided with following option:

Presumptive Scheme of Taxation (Section 44AD): It is applicable only to individuals, HUF and partnerships other than LLP such that the turnover in previous financial year does not exceed 3Cr (provided cash receipts should be less than 5% of total turnover), otherwise 2Cr. The taxable profits would be considered as 8% of the turnover (6% if turnover received through account payee cheque or electronic transfer). Such option needs to be opted for minimum of 5 consecutive years and if the above mentioned conditions are breached, the person will not be able to take such benefit for next 5 years.

Example: XYZ partnership firm has turnover of Rs.1.2Cr for FY 2022-23. The income will be considered as 8% of Rs.1.2Cr i.e. Rs.9.6 lakh. The tax liability will be calculated by applying applicable tax rate to Rs.9.6lakh.

Indirect Tax Benefits to MSMEs

In order to reduce compliances for MSMEs, following schemes are in place under GST Act, 2017-

Composition Scheme: This scheme was introduced to reduce compliance and paper work for small businesses. It allows MSMEs having yearly turnover upto Rs.1.5Cr to file quarterly returns with GST liability rates ranging 1-5% instead of the prevailing rates of 18% generally. This helps to manage the working capital efficiently. To opt for this scheme, it is essential to have operation within a state as inter-state transactions are not covered. Opting for composition scheme prevents from taking input tax credit. This GST liability cannot be charged to customer. It is an out-of pocket expense for the business.

Example: A manufacturer with operations in Maharashtra with annual turnover of Rs.1Cr can opt for this scheme with 1% GST liability to be paid on its own (without charging it to customers). Also, input tax credit on purchases cannot be taken.

Threshold Exemption: If the business has an annual turnover upto Rs.40 lakh (for goods in most of the States) and upto Rs.20lakh (for services), it is not mandatory to have GST registration. However, this would limit the business from taking input tax credits.

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