We have seen the rise of a new kind of business in India that is professionally managed and organised but not limited to traditional ideas about what constitutes "enterprise" or "trade."
This new kind of business is often called a small business, an independent professional practice, or even a cottage industry.
The challenge for many such businesses is taxation. By definition, small businesses are not large enough to hire full-time employees; they usually consist of one person or family that provides certain goods and services.
If you are one such entrepreneur, then this article will answer all your questions about taxation issues faced by small businesses in India.
Before we get into the nitty gritty details of taxation in India, let's first look at what constitutes a small business.
A small business is one that has an annual turnover of Rs 50 lakh or less. This means it will be exempt from paying any tax on its profits and other incomes.
You can only claim this exemption if your annual revenue is at most Rs 50 lakhs after deducting all costs related to running your business.
If you do go beyond Rs 50 lakhs in revenue, then you will have to pay taxes according to your industry segment for each state where your company operates in India (more about them later).
What legal structures can one use to run a small business in India?
In order to run a small business in India, there are various legal structures that one can choose from. The most common structures are:
- Limited Liability Partnership (LLP) – This is the most preferred business structure for many startups as it has a number of benefits and minimum compliance requirements.
- Partnership firm – Partnerships are formed by two or more individuals and have no legal existence separate from their members. They do not pay income tax on their profits but distribute them among partners who declare them as income in their personal tax returns.
There are two types of taxes in India: direct taxes and indirect taxes. A direct tax is a tax you pay on your income, such as personal income tax or corporate tax.
An indirect tax is a sales tax applied to goods and services you purchase, such as the goods and services tax (GST).
The GST system was enacted in 2017 to replace all other indirect taxes—which included state value-added taxes (VAT), excise duty and customs duty—and apply them uniformly across the country.
What is GST?
The goods and services tax (GST) is a comprehensive indirect tax system that allows for a single point collection at both production stages (manufacturing) as well as sales outlets across India.
It was introduced on July 1st 2017, by Union Finance Minister Arun Jaitley with an aim to simplify the existing multiple-slab structure into one uniform pan-India rate structure with fewer exemptions which would make trade seamless at both domestic & international levels.
TDS rates are applicable on payments made by Government / Non-Government
6% on payments made by Government / Non-Government to individuals. The TDS rate, if applicable, is deducted at the time of making payment.
Is any scheme for presumptive taxation available to small businesses?
Yes, there is a scheme for presumptive taxation available to small businesses.
In this scheme, the Income Tax Department categorises all taxpayers (except non-resident citizens) into one of the following ten categories:
- New/small business
- Repetitive small business
- Non-exempted general dealer (such as a commission agent)
- Professionally qualified person, such as an architect or doctor
- Chartered accountant or cost accountant firm
- Architect and engineers
- Banker who has a turnover of less than Rs 5 crore
What tax benefits are available to small companies?
You will be eligible for tax benefits if you are a business owner. Let's see what these are in detail:
- Corporate tax rate: If your turnover is up to Rs 50 lakhs, you can claim a deduction under Section 35A of the Income Tax Act by paying a flat rate of 6% on profits made from manufacturing or services activities. For companies whose turnover is more than Rs 50 lakhs but less than Rs 1 crore (Rs 1 million), corporate tax rates increase incrementally as follow:
- First Rs 25 lakhs of profit - 10%
- Next Rs 25 lakhs (i.e., between Rs 25 and 50 lakh) - 15%
- The remaining amount is above Rs 50 lakh - 30%.
Now you know the basics of taxation and taxes on small businesses in India. If you're looking to start your own business, keep these things in mind.
A small business is one that falls under a turnover range of INR 20 lakhs or less (or equivalent).
You do not have to register for GST if your annual turnover is below INR 20 lakhs (or equivalent).
However, if you are dealing with interstate supplies or supplying goods to other states, it's advisable to register yourself for GST.
If your turnover exceeds INR 20 lakhs (or equivalent), then it becomes compulsory for you to register for GST.
Taxation of small businesses in India is a complex and often confusing subject, but it can be simplified.
The first step to understanding your tax obligations as an entrepreneur is to understand what you are required to pay.
While there are many different types of taxes in India, the following topics will guide you through the most common ones:
- Taxes for Small Businesses (SMEs)
- Self Assessment Tax for Individuals (SATI)
- VAT on Goods and Services (VATGST)
- Service Tax on Services (STS)
FAQs Related to Taxation of small Business in india
1. What is the difference between Section 194C and Section 194J?
Under Section 194C, a company can claim a deduction for depreciation based on the MACRS method (20% each year) and not the straight-line method. However, your profits are less than Rs 2 crore, and you have invested more than 50% in the land. In that case, you can claim a deduction under section 40A instead of claiming depreciation under section 194C or any other special provision like ITPL etc. This means that both these incentives apply simultaneously, but only one can be claimed per your eligibility criteria.
2. What are the tax benefits under Section 194J?
Suppose a manufacturer produces goods through substantial job creation. In that case, he/she becomes eligible for certain deductions under Section 194J, like 'Research & Development' or 'Training' expenses incurred during FY19-20(assume this is applicable from 1 Apr 2019 to 31 Mar 2020). These expenses up to 10% of his/her turnover qualify him/her for claiming deduction with respect to such expenditure towards R&D activities undertaken by him/her during FY19-20, provided there has been no carry forward provision available pertaining thereto.
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