Tax Rules for SME

Tax Rules for SME

28 March, 2023

In a move to ensure Small and Medium-Sized (SME) Enterprises continue to set up their manufacturing bases in India, the Indian government has extended the concessional tax rate of 15% till March 2024. This is not the first time. In September 2019, it was announced that the corporate tax rate would drop to 22% from 30%.

For SMEs, taxes are an integral part of their business, and as such, it is important to take note of the nuances of taxes. Knowing about the exemptions you are eligible for can go a long way in saving a significant amount of money.

The past year was a turbulent time for SMEs, which continued to reel under financial losses due to the COVID-19 pandemic. But did you know that numerous tax credits and deductions can be used to offset business expenses? Here are some tips for small and medium-size business owners to save on taxes:

  • Deduction of expenses related to business: SMEs are allowed to claim deduction on costs incurred while running the business. These expenses are charged against the revenue as a deduction, which in turn reduces the tax liability.

  • Initial setup expenses: Entrepreneurs are allowed to claim a deduction for all the preliminary expenses incurred while setting up an SME. This includes research reports, market studies, and related initial expenses under Section 35D of the Income Tax Act, 1961.

  • Additional depreciation: The IT Act also allows an additional depreciation of 20% on new machinery. This is meant to benefit specific industries notified under Section 35AD and is applicable only in the first year of the new machinery purchase.

  • Fixed assets: Equipment such as computers, printers, furniture, machinery, etc., are shown in the balance sheet as fixed assets. Such expensive equipment can be depreciated as mandated over their appropriate life, and the same can be deducted from the earnings. Expenses incurred towards maintenance are also eligible for deduction.

  • Hiring a family member: SME owners can hire a family member to help set up the business, and they can be paid a reasonable amount as a professional fee or salary, depending on the nature of engagement. The family member will be required to file for taxes as applicable. If they fall in the non-taxable bracket, the overall tax component of the family reduces substantially. However, such engagement should not breach fundamental norms and should not amount to illegal activity.

  • Client expenses: Meetings and interactions with clients that enable the advancement of the business and facilitate the building of required client networks qualify as expenses pertaining to the business. All spends regarding these are considered business-related expenses, and the bills can be used to claim deductions. This can reduce the tax liability substantially.

  • Medical insurance: Health coverage is important for all, and business owners are allowed to claim ₹25,000 towards medical insurance under Section 80D. Premiums paid on medical insurance for dependents (spouse, children, and parents) are also deductible.

  • Penalty relief: Some penalties – such as those applied on failing to file a tax return or a delay in payment of taxes – are eligible for penalty relief. But this is only applicable if you were unable to meet deadlines despite following the legal protocol and the lapse is due to unavoidable circumstances. The government’s leeway to MSMEs from penalties and interest on GST non-compliance was a part of Covid relief. This was aimed at enterprises with a turnover of lower than ₹5 crore.

  • Reduced tax burden: The government introduced the presumptive taxation scheme to provide relief to small taxpayers, including individuals, HUF (Hindu Undivided Family), partnership firms, etc., as of February 2022. The existing rate of deemed profit of 8% under Section 44AD has been reduced to 6%, giving SME owners a total tax savings of at least 40%. This is a huge relief to small businesses such as petty traders and kirana shops, and offers meaningful savings.

As an SME owner, you should abide by the tax regulations and file for taxes before the due date. This will enable you to maintain appropriate tax records, which in turn will promote business growth and establish your reputation for ethical corporate governance.

With HDFC Bank, registered MSMEs can get unsecured Business Loans with minimal documentation and at affordable EMIs. Whether you are looking to manage operational expenses or expand your business and hire more talent, HDFC Bank can help you secure the right business funding.

Looking to Apply for Business Loan? Click Here.

Learn about Direct and Indirect Tax as a Business owner by clicking right here.

​​​​​​​*HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.