How does the Indian taxation system work for MSMEs?
03 January, 2023
Micro, Small and Medium Enterprises (MSMEs) are essential to the Indian economy for a variety of reasons. With over 6.3 crore MSMEs in India, not only are millions of people becoming self-employed, but they are also able to generate employment. About 20% of MSMEs in India are rurally based, thereby ensuring income in smaller towns and villages. MSMEs contribute a third of India’s manufacturing output and account for 45% of the country’s exports. This sector has maintained a 10% growth rate, and the government understands the importance of sustaining it.
The Union Budgets are an indication of the various initiatives that the government promotes for the MSME sector. This year’s budget includes the interlinking of portals like Udyam, ASEEM and e-Shram, credit schemes and blended capital facilitation under NABARD, to name a few.
Along with these steps, providing tax benefits is an immediate, effective, and tangible way of supporting the MSME sector. Let us look at the tax benefits that MSMEs can enjoy in India.
Concessional tax rate: Certain domestic manufacturing companies are eligible for concessional tax rates under the Income Tax Act, 1961. These companies, coming under section 115BA of the Income Tax Act, are eligible for a tax rate of 25% instead of the usual 30%. With a turnover of up to ₹400 crore as one of the criteria, it includes the MSME sector exclusively. Specified deductions, set-offs, and carry-forwards are not allowed to these companies. The company must be set up and registered on or after March 1, 2016.
MSMEs can also avail of a tax rate of 22% under section 115BAA, provided that they comply with certain conditions. Any domestic company, including MSMEs, can avail of this reduced tax rate by calculating their total income without considering various deductions, depreciation, and set-offs. These companies are also exempt from the payment of maximum alternate tax under section 115JB.
New manufacturing domestic companies can also opt for a 15% tax rate under section 115BAB. The requirement under this section includes all the conditions under section 115BAA. Besides this, the company needs the following:
To be set up and registered on or after October 1, 2019.
It cannot claim deductions under section 80-ID.
It cannot be engaged in any other businesses.
Presumptive tax scheme: There are several presumptive tax schemes that MSMEs can opt for and reduce their tax liability. All these schemes can be availed subject to the fulfilment of specific conditions. For instance:
Section 44AD is available to eligible businesses with a total turnover or gross receipt of ₹2 crore or less.
Presumptive taxation scheme under section 44ADA is available for professionals.
Good carriage businesses can opt for section 44AE.
MSMEs can compare their tax liability under the applicable presumptive tax scheme and opt for it if beneficial.
New benefits: This year’s Union Budget extended the tax benefits for new and eligible start-ups. These eligible start-ups were provided with a three consecutive year tax incentive during the first ten years of their incorporation. While it was available for eligible start-ups established before March 31, 2022, it has now been extended to March 31, 2023.
As mentioned above, section 115BAB allowed a reduced 15% tax rate for newly incorporated domestic manufacturing companies. In this year’s Union Budget, the finance minister proposed extending the last date for commencement of production or manufacturing from March 31, 2023 to March 31, 2024.
MSMEs engaged in secondary steel production will get an extension of customs duty exemption on steel scrap. The finance minister sought to grant additional relief to MSME secondary steel producers through the Union Budget.
Presently, the eligibility of an entity to be classified as MSME is based on the investments made in plants, machinery, or equipment. Manufacturing MSMEs must have an investment of up to ₹25 lakh, ₹5 crore, and ₹10 crore, respectively. Similarly, service MSMEs must have an investment of up to ₹10 lakh, ₹2 crore, and ₹5 crore. If you have or are a part of an MSME, you can ensure that your organisation optimises its tax benefits by following the aforementioned provisions and sections.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. 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.
