As per knowledge from the Ministry of Micro, Small & Medium Enterprises (MSMEs), as of November 25, 2022, the Udyam Registration portal has registered 12,201,448 MSMEs, which includes of micro-enterprises at 11,735,117 (96.17% app.), adopted by small enterprises at 426,864 (3.49 % app.) and midsized enterprises at 39,467 (0.32% app.). Notably, India has a major variety of MSMEs, which additionally play a pivotal function in financial development.
Thus, to additional enhance small and medium businesses in India, the federal government ought to take into account rationalising sure earnings tax provisions for small enterprise and professionals in Budget 2023.
1. Increasing the financial restrict for presumptive taxation and lengthening the profit to LLPs – Section 44ADSection 44AD of the Income Tax Act, 1961 is a particular provision for computing earnings and positive factors of enterprise on presumptive foundation. As per the prevailing provisions, an eligible taxpayer engaged in an eligible enterprise (specified beneath the part) can straight deal with 8% of the Gross Receipts/Sales/Total Turnover as enterprise earnings. However, in case the gross receipts or whole turnover pertaining to the related monetary 12 months is acquired by specified modes akin to an account payee cheque, account payee financial institution draft, ECS or via such different digital mode (i.e., specified modes apart from money, bearer cheque, and many others.), then such presumptive fee can be additional diminished to six% in respect of such turnover.
The restrict for presumptive taxation was final elevated in Budget 2016 from Rs 1 crore to Rs 2 crore. Therefore, to accommodate for development in financial exercise and the quantity of enterprise since then, it’s advised that the ceiling could also be elevated to Rs 5 crore.
Further, the stated part explicitly offers that Limited Liability Partnerships’ (LLPs’) can’t take profit beneath this part. In our opinion, many small businesses in India are included as LLPs and are unnecessarily disadvantaged from availing the advantage of presumptive tax charges. Hence, it’s advised that the advantage of part 44AD may additionally be prolonged to LLPs in circumstances the place the gross sales doesn’t cross the desired restrict.
2. Rationalising sure provisions of part 44ADA relevant for professionals
Section 44ADA accommodates presumptive tax provisions for professionals engaged in authorized, medical, engineering or architectural occupation or the occupation of accountancy or technical consultancy or inside ornament or every other occupation as notified by the CBDT. Further, the profit beneath this part is just for these professionals whose respective whole gross receipts/whole gross sales don’t exceed Rs 50 lakh in a specific monetary 12 months. Eligible professionals can deal with 50% of the overall gross receipts as enterprise earnings.
In order to encourage and lengthen profit to small and medium professionals, it is strongly recommended to appropriately improve the brink restrict of Rs 50 lakh to at the very least Rs 1 crore. This will assist carry extra professionals throughout the ambit of this part and can be a transfer in direction of ease of doing enterprise.
Further, as a result of rising value of rendering providers by professionals, treating 50% of the gross receipts as earnings could in the end show to be unfavorable for professionals with small businesses. This excessive fee could result in plenty of professionals not choosing this scheme thereby defeating the final word goal behind this provision. Hence, additionally it is advised that the presumptive fee of earnings at 50% of the overall gross receipts could also be diminished appropriately, say to 30%.
3. To handle challenge of non-grant of full TDS credit showing in Form 26AS
As per the prevailing earnings tax return (ITR) processing mechanism, small businesses and professionals aren’t granted full TDS credit score showing in Form 26AS in circumstances the place the earnings provided within the ITR kind (as per books) is decrease than that reflecting in Form 26AS.
It is essential to notice that the receipts as showing in Form 26AS could also be pertaining to earnings already provided to tax in previous monetary years or could also be receipt of advance earnings and showing in present 12 months’s Form 26AS on account of distinction in technique of accounting adopted by the deductor and the taxpayer.
The result’s non-grant of TDS credit score to the taxpayer both within the previous monetary 12 months by which earnings has been provided (as TDS credit score doesn’t seem in Form 26AS for that monetary 12 months) or within the subsequent 12 months by which it’s showing in Form 26AS (because the earnings as per books is decrease than gross receipts showing in Form 26AS), leading to lack of TDS credit score to the taxpayer.
Therefore, in such circumstances, it is strongly recommended to change the ITR processing mechanism process and guarantee TDS Credit be allowed within the 12 months by which it’s showing in Form 26AS even when gross receipts as per Form 26AS are increased than earnings as provided within the ITR.
4. Enhancing the brink restrict of TDS u/s 194J and lengthening the identical to administrators
Budget 2012 amended the provisions of part 194J of the Income-tax Act. This part requires tax to be deducted at supply at 10% on any remuneration or charges or fee, by no matter identify known as, paid to a director of an organization. This excludes wage fee on which tax is deductible at supply beneath part 192. However, if the fee is made for royalty, price for technical providers, price for skilled providers and non-compete charges then the duty to deduct TDS arises provided that the stated fee exceeds Rs 30,000, independently.
In our view, this unintended disparity between fee to administrators and different funds needs to be rationalized and the impartial restrict of Rs 30,000 also needs to be prolonged for funds to administrators. Also, small enterprise and professionals are unnecessarily burdened with TDS compliances due to the low threshold restrict and thus, the stated restrict should be revised upward to Rs 50,000 in order to exclude small enterprise enterprises from its scope.
5. Reduction in earnings tax fee for Partnership Firms and LLPs with small businesses
Professionals and small businesses are sometimes included as partnership corporations or LLPs as in comparison with corporates on account of ease of formation, low value of operation, diminished compliance burden and lots of such components. As per the current legislation, partnership corporations and LLPs are taxed at flat 30% (plus relevant surcharge and cess). However, these businesses arrange and working as personal restricted corporations are given the advantage of diminished efficient tax charges akin to 25.17% or 17.16%, topic to achievement of sure situations.
A major class of small and medium businesses function both as partnership corporations or LLPs and so they pay tax at a a lot increased fee and furthermore, they don’t have any choice to pay tax at a concessional fee. Thus, as a way to promote entrepreneurship, to encourage extra enterprise entities in India and to succeed in the milestone of USD 5 trillion financial system by 2025, there’s a want to cut back the tax charges for partnership corporations and LLPs or introduce a concessional regime for partnership corporations and LLPs having turnover as much as a sure restrict in order to carry them at par with the corporates.
6. Rationalisation of TDS charges for start-ups, small businesses
Certain sections present a nominal TDS fee (as an illustration, Section 194C – relevant for contracts imposes a TDS fee @ 1%/2% relying upon the character of tax deductee whereas 194H- relevant for commissions imposes a TDS fee of 5%) whereas the TDS charges in sure different sections (Section 194J – relevant for Professional Services and Section 194-I – relevant for TDS on lease of land & constructing) could go as much as 10%.
Subjecting small businesses and start-ups to withholding necessities imposes restriction on their liquidity which is a crucial issue for functioning of the enterprise operations and creates working capital points. Thus, it is strongly recommended that the TDS charges might be rationalized and diminished from 10% to five% beneath part 194J and 194I.