The MSME tax benefits every business owner must know

If your business falls in the Micro, Small, and Medium Enterprises (MSME) category, you are part of a community that forms the economic backbone of the country. For the government, the welfare of MSME businesses is a top priority, and MSME tax benefits are one of the many steps towards it.

Apart from MSME tax benefits, MSME businesses receive encouragement through various government initiatives.

MSME in India – a snapshot
 

MSME was introduced in India in 2006 with the Micro, Small and Medium Enterprises Development Act, 2006. Presently, 96% of industrial units in the Indian financial landscape are small businesses that fall into the MSME category. They contribute 40% of India’s industrial production and 42% of exports. There are nearly 634 lakh MSMEs in India that employ 11.1 crore people. The Indian government aims to add 5 crores more employment through MSMEs.

Your small business can enjoy certification reimbursements, delayed payment protections, subsidies, interest subventions and a host of other benefits. One such important benefit that you must aim to leverage is MSME tax benefits.

Key MSME tax benefits
 

Some of the important MSME tax benefits are tax holidays and exemptions, reduced tax rates and indirect tax benefits. These include,

• Exemptions and deductions under the Income Tax Act

Section 80J of the Income Tax Act provides a deduction of up to 6% per annum of the capital employed from the profits of new industrial undertakings, ships and hotels in certain cases.

Section 80IB also allows deductions from profit and gains to businesses engaged in oil refining, processing, preservation, and packaging of certain food products, handling, storage, and transportation of food grains , and operating and maintaining hospitals. The deduction allowed is 25-100% of profit for five to seven assessment years, depending on the businesses mentioned in the sub-sections.

• Exemption on capital gains

Section 54GB of the Income Tax Act provides a capital gain exemption to taxpayers who invest the net consideration of a sold residential property in the equity shares of an eligible startup company. If your small business is an eligible startup, you can attract investment through this tax-incentivised route.

• Tax concessions

MSME tax benefits are also available in the form of concessional tax rates. This includes,

Section 115BA - Section 115BA has reduced the tax rate from 30% to 25% for eligible domestic manufacturing companies, including MSMEs, engaged in manufacturing or production. Companies with turnover of up to Rs 400 crores are eligible for this concession. If you avail of this reduced rate, you will not be able to enjoy the benefit of Chapter-VIA deductions, carryforwards and set-offs. You are also not required to pay Minimum Alternate Tax and Dividend Distribution Tax.

Section 115BAA - Companies not eligible for concession under section 115BA can enjoy MSME tax benefits under section 115BAA. It is available to businesses and professions of any sector and allows a concessional rate of 25% but forbids the claims of exemptions and deductions allowed under the regular provisions. Subject to conditions, the concessional income tax rate can be further reduced to 22%.

Section 115BAB – A new business engaged in manufacturing or production can file its income tax returns by paying a concessional tax of 15% of total income. The section excludes specific businesses like mining, book printing, gas cylinder bottling, etc. from the purview of this section. Exemptions and deductions available under the regular tax regime are not available to companies opting for the MSME tax benefits under section 115BAB.

Presumptive tax – Presumptive tax benefits under sections 44AD, 44ADA and 44AE can also be included under MSME tax benefits. In section 44AD, tax is calculated as a percentage of total turnover without any detailed accounting requirements. Section 44ADA charges tax on gross receipts of eligible professionals. Section 44AE offers presumptive tax benefits to businesses engaged in goods carriage.

New developments in MSME taxes
 

Recent changes and updates in rules regarding MSME tax benefits were announced in,

• Cooperative societies –
  
  

  Cooperative societies engaged in manufacturing or production, formed FY 2023-24 onwards and started operations before 1 March 2024 will be eligible for a concessional tax rate of 15%.

• Startup incorporation –
  
  

  Startups seeking MSME tax benefits can now receive the same for a year more. The period of incorporation of startups has been extended by a year from 1 April 2023.

• Set off and carry forward –
  
  

  Section 79 of the Income Tax Act was amended by the 2023 budget. Accordingly, carry forward and set off of losses can be made by startups for ten years after incorporation instead of seven.

• Presumptive taxation scheme -
  
  

  The gross turnover/receipts threshold under the presumptive taxation scheme has been raised from Rs 2 crore to Rs 3 crore. This will attract more taxpayers into the scheme and expand the reach of MSME tax benefits.

• Amortisation –
  
  

  Preliminary expenses can now be amortised from the books of an MSME with  the approval of the board. 

• Payments to MSMEs –
  
  

  Section 43b(h) now includes payments made to MSMEs. However, these payments will be admissible on an accrual basis only when payment has been made within the time specified by the MSMED Act.

How MSMEs manage tax regulations and compliances
 

To optimise the MSME tax benefits available, you must follow some very basic steps as a business owner. This includes,

• Expert support –
  
  

  Engage with a reliable tax consultant who can guide you in taxation and compliance. It is an added advantage if the consultant has experience in your industry and the MSME segment.

• Technological support –
  
  

  The business must maintain its records in tax-compliant software so that calculations and due amounts are automatically calculated.

• Tax planning –
  
  

  The business decisions must be made keeping tax planning in mind. Your current account can get linked to an interest subvention or subsidy opportunity through your timely action.

• Basic knowledge –
  
  

  The business owner must be regularly updated on the latest developments in taxation laws and maintain a basic familiarity. This culture must be fostered among employees as well.

MSME tax benefits – A use case
 

An MSME company engaged in the processing, preservation and packaging of dairy products was formed after FY2009-10. It was an eligible entity to avail of the section 80-IB (11A) benefits. Accordingly, it received a 100% tax deduction on profits during the first five years of its business. In the next five years, it received a 30% deduction. These benefits are also available for similar businesses with products like poultry, marine products, meat, fruits and vegetables.

Maximising MSME benefits  
 

As an MSME business owner, you can add to the growth of your business by maximising the MSME tax benefits offered by the government. Choosing the right banking partner can streamline these efforts and allow you more time to concentrate on business goals.

IDFC FIRST Bank offers a suite of several MSME Current Account options for business owners like you. The IDFC FIRST Bank Startup Current Account is tailor-made for MSME startups. It offers more than 100 Beyond Banking Services. Apart from solutions for human resource management systems, ERP, cloud services and co-working spaces, these services also cover your legal and taxation needs. Choose your IDFC FIRST Bank Current Account today.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.