What are the Tax Benefits for MSMEs?
12 November, 2024
Synopsis:
MSMEs benefit from reduced tax rates, with a concessional 25% rate for companies with turnovers under ₹400 crore.
Presumptive Taxation under Section 44AD simplifies tax filing for businesses with turnovers up to ₹3 crore.
Tax holidays offer exemptions for up to five years, and startups can avail profit-linked holidays under Section 80-IAC.
In India, MSMEs play a crucial role in the economy, contributing to employment, innovation, and economic diversity. The government recognises their importance and provides various tax incentives to support these enterprises. This article discusses the specifics of MSME tax benefits in India, including exemptions, deductions, and other advantages.
Key Tax Benefits for MSMEs
Direct Tax Benefits for MSMEs
MSMEs can take advantage of reduced tax rates. Domestic companies with turnovers under ₹400 crore face a concessional tax rate of 25%. Other MSME tax benefits include:
1. Presumptive Taxation Scheme
Section 44AD of the Income Tax Act offers a Presumptive Taxation Scheme to simplify tax filing for small businesses. Eligible taxpayers, including individuals, HUFs, and partnership firms (except LLPs), can declare 8% of their turnover as income (6% for digital transactions) without maintaining extensive accounts. This scheme applies to businesses with turnovers up to ₹3 crore. However, once opted in, taxpayers must follow the scheme for five consecutive years or face disqualification from re-entering it for the next five years.
2. Tax Holidays
Tax holidays allow MSMEs to be exempt from certain taxes for a limited time, promoting growth in certain industries or regions. MSMEs can benefit from a five-year exemption starting from the year production begins. Eligible start-ups under Section 80-IAC can avail of profit-linked tax holidays for three years within ten years of incorporation.
3. Depreciation Benefits
MSMEs in India benefit from deductions on assets like machinery over their useful life, reducing taxable income year by year. With accelerated depreciation, they can claim higher deductions in the initial years, freeing up capital for reinvestment and supporting business expansion.
4. Carry Forward of Losses
MSMEs can carry non-speculative business losses for eight years and apply these losses to future business income. On the other hand, speculative losses can be carried forward for just four years and can only be offset by speculative earnings.
For MSMEs to carry forward losses, they must file ITR before the due date. Failing to file on time disqualifies the business from carrying forward losses. Moreover, the company doesn't need to operate in the following years to claim these losses.
Indirect Tax Benefits for MSMEs
1. Goods and Services Tax (GST)
Introduced on July 1, 2017, MSME benefits in GST consolidate various indirect taxes previously levied by central and state governments, including VAT, excise duties, and service tax, to create a uniform tax structure.
To aid MSMEs, the government has set a threshold limit, allowing companies with annual turnover up to ₹40 lakh for goods and ₹20 lakh for services to be eligible for this MSME GST exemption. MSMEs may also opt for the Composition Scheme, offering reduced GST rates between 1% and 6%.
2. Excise Duty
Excise duty is a tax applied to goods manufactured domestically. The government grants full MSME tax exemption on certain outputs to support MSMEs. To qualify, MSMEs must meet specific requirements, such as having an annual turnover below a pre-defined limit. Originally, the exemption cap was ₹30 lakh, but it has been raised to ₹100 lakh over time. Furthermore, MSMEs enjoy simplified regulatory obligations and are not required to maintain statutory records.
3. Custom Duty
To support MSMEs and enhance domestic manufacturing and exports, the Indian government has introduced several customs duty incentives. Recent budget updates feature cuts in customs duties for spandex, leather, and marine products. Not only that, the Import of Goods at Concessional Rate (IGCR) scheme allows for reduced duties on imported raw materials.
Export duties have also been reduced on wet blue and crust leather products. Additionally, MSMEs can benefit from the Authorised Economic Operator (AEO) status, which provides advantages like Direct Port Delivery (DPD), Direct Port Entry (DPE), faster customs clearance, and exemption from bank guarantees.
State-Specific Tax Benefits for MSMEs in India
Andhra Pradesh: Andhra Pradesh has established an extensive MSME policy featuring various tax benefits. It fully refunds stamp duty and transfer duty for MSMEs when acquiring or leasing land. Furthermore, MSMEs can avail of a 25% discount on electricity bills.
Gujarat: Renowned for its business-friendly atmosphere, Gujarat offers multiple tax advantages for MSMEs. It grants a complete exemption from electricity duty for a duration of five years and a 50% subsidy on the expenses associated with new technology procurement.
Tamil Nadu: Tamil Nadu provides numerous incentives for MSMEs, such as a 50% grant towards the expenses of installing effluent treatment plants and a 25% capital subsidy for micro-enterprises on the purchase of plant and machinery.
Uttar Pradesh: Uttar Pradesh has introduced various initiatives to assist MSMEs, including a 50% interest subsidy for micro-enterprises and a complete exemption from stamp duty in specific regions. Additionally, the state offers an annual infrastructure interest subsidy of up to 50% for sanctioned projects.
Maharashtra: Maharashtra extends a 100% waiver on stamp duty for MSMEs in designated districts and a 50% subsidy on establishing solar power facilities. A 25% capital subsidy is also available for MSMEs in the manufacturing industry to acquire plant and machinery.
Recent Tax Reforms and Government Initiatives
In the Union Budget for 2024, Finance Minister Nirmala Sitharaman revealed substantial modifications to the tax system directly affecting Micro, Small, and Medium Enterprises (MSMEs). The updated tax structure features new rates, with individuals earning between ₹6-7 lakh now taxed at 5% rather than 10%, and those with incomes between ₹9-10 lakh taxed at 10% instead of 15%.
Other than taxation, another major initiative is the Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE), which facilitates collateral-free MSME loans by providing a guarantee cover of up to 75% for loans up to ₹5 crore. Another noteworthy programme is the Government e-Marketplace (GeM), an online public procurement platform designed to promote the acquisition of goods and services from MSMEs by various government ministries and departments.
Conclusion
Tax exemptions for MSMEs in India offer significant financial relief and support to businesses, fostering their growth and development. MSMEs can optimise their financial management and enhance their competitiveness by understanding the various tax benefits available, such as reduced corporate tax rates, GST advantages, and customs duty exemptions.
Disclaimer: *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.
