Taxes are an essential part of governance and paying them is an obligation that all businesses have to fulfill. For Micro, Small, and Medium Enterprises (MSMEs) too, paying taxes is a legal mandate. However, it doesn’t end there. For small businesses, paying taxes is also a crucial element of their contribution to the economy as a whole. By fulfilling their business tax obligations, MSMEs complete their formalization and actively participate in the development of their communities and the nation’s infrastructure.
MSMEs can benefit from exploring legitimate strategies to optimize their tax liabilities. With the right strategy, these businesses can reduce their tax burden, freeing up resources to invest in their operations and expansion. Tax saving strategies for small business owners include making the most of available tax deductions, incentives, and exemptions reserved for small businesses. Proper tax planning and structuring can help MSMEs maximize their tax efficiency while remaining compliant with tax regulations. This way, small businesses can optimize their tax outgo, strengthening their financial position and credibility, enhancing their competitiveness, and fostering sustainable growth in the long term. Let’s explore the importance of taxes for MSMEs and tax saving for small businesses.
Paying taxes comes with several significant advantages for MSMEs beyond compliance, particularly because it is a hallmark of formalization and giving back to the economy. Firstly, contributing taxes helps MSME fulfill their civic responsibility, positioning them as active participants in the development and maintenance of essential public services and infrastructure. Tax compliance also enhances the credibility of MSMEs, building up their reputation among customers, suppliers, and investors.
Another major advantage of paying taxes is that it facilitates access to government support programs, grants, and incentives aimed at boosting MSME growth and fostering innovation. By fulfilling their tax obligations, MSMEs contribute to a stable and conducive business environment, further adding to their role in fostering economic growth, job creation, and social progress.
While taxes are inevitable, there are various tax saving strategies for small businesses, which can be leveraged to optimize MSME tax liabilities. Let’s look at how business save tax:
Properly deducting tax at source is a good move for MSMEs. Tax deduction at source (TDS) means that the businesses withhold a certain percentage of payments made to vendors, contractors, or employees and remit it directly to the tax authorities. There are clauses under the Income Tax Act that allow entrepreneurs purchasing a service or product to deduct tax at source when making payments to the seller. If they fail to do so, the expenses may become ineligible for tax deduction, adding to the tax liability of the business. By adhering to TDS provisions, MSMEs can ensure compliance with tax laws and avoid the risk of penalties or legal consequences related to non-compliance.
Maintaining a proper record of expenses is extremely important for MSMEs in general. For those looking to save on business tax, this is even more critical. By carefully documenting all business-related expenditures, MSMEs can make the most of various applicable tax deductions and exemptions. The business expenses may encompass operating costs, raw materials, employee salaries, and overheads. Comprehensive expense tracking facilitates accurate tax reporting and also provides important insights into the financial health and operational efficiency of the business.
Depreciation is an important tool for MSMEs to lower their tax burden. It refers to keeping track of the wear and tear of tangible assets of the business, and claiming tax exemptions against it. Depreciation allows businesses to spread out the cost of acquiring assets, like machinery, equipment, vehicles, and even buildings and premises, across the lifespan of the asset. There are several ways of calculating depreciation, including straight-line depreciation, the declining balance method, and units of production method. Depending on the nature of the business and assets, MSMEs can choose the one that will optimize their small business tax deduction.
The digital transformation that has been unfolding in India has already made digital transactions the go-to option for millions. For MSMEs, embracing digital transactions is also a way of saving tax. Transactions of more than Rs 20,000 paid in cash to an individual in a single day cannot be accounted for in official financial records, which means they won’t be recognized as legitimate expenses for tax purposes. If you are making cash payments for employee salaries or raw material purchase, or any other business expense, if the amount exceeds the limit, the transaction can come under scrutiny. It will also add to your overall tax burden because such transactions won’t be deductible for tax purposes. Instead, use digital means to make substantial monetary transfers.
The government offers various tax incentives and deductions specifically tailored to support MSMEs. MSMEs can benefit from deductions such as Section 80C (for investments in specified instruments) and Section 80D (for health insurance premiums). There are tax holidays for specific industries like mineral oil and natural gas production, reduced tax rates for businesses with turnovers exceeding ₹50 Crores, and the option to benefit from the Composition Scheme under GST for turnovers surpassing ₹1.5 Crores annually. MSMEs can also avail of capital gains exemptions and claim investment allowances of 15% for investments in plant and machinery/equipment. By registering on the Udyam portal and keeping a transparent record of all their assets, liabilities and expenses, MSMEs can make the most of these incentives.
MSMEs involved in export and export-related activities can capitalize on the export promotion schemes offered by the government to reduce their tax outgo. Schemes such as the Merchandise Exports from India Scheme (MEIS) and the Export Promotion Capital Goods (EPCG) Scheme provide incentives, and exemptions have been implemented to encourage and facilitate exports.
While it is extremely important for MSMEs to pay taxes, there are a number of strategies for tax savings for small business owners and benefits that they can leverage to lower their tax burden. From being aware of government incentives and export promotion schemes to deducting tax at source and maintaining proper financial records, there are a lot of things MSMEs can do to ensure efficient tax planning. As the backbone of the economy, the MSME sector has a major contribution to the growth of the economy, and proper tax compliance will only enhance this role, making them part of the growth story of the country in every way, including infrastructure development. There are various ways to save on taxes for small business owners, but it’s important to remember that it is essential for these businesses to fulfill their business tax obligations.
1. Can MSMEs benefit from any specific government tax incentives?
Yes, there are several tax incentives and benefits for MSMEs, including MSME tax exemption, which is available to businesses under Section 80J of the Income Tax Act. MSMEs with an annual turnover of more than ₹50 crores can also claim a reduced tax rate of 25%.
2. What are the tax benefits with business loans?
The interest portion of the business loan is allowable as a deduction from the profits made by a company. This lowers your overall tax burden if you have a running business loan, as you can claim the interest outgo as a deduction.
3. Can MSMEs claim tax credits for employee benefits?
Companies can claim tax deductions on employee benefits such as health insurance, retirement benefits, and paid time off. These benefits are considered part of the employee’s compensation and are deductible expenses for the company.
4. How often should MSMEs review their tax-saving strategies?
MSMEs should ideally review their tax-saving strategies at least once a year to account for both changes in tax regulations, and internal factors like expansion, turnover growth, etc., which could affect their tax liability.
