Start-ups, SME & Small Business Taxation
Legal structures for SME & Small Business
The choice of a business organization is driven by a combination of several factors such as nature of activity, capital requirement, degree of independence required, etc. There is no ready made formula for selecting the particular type of business organization. Tax consideration is also an extremely important factor besides incurring recurring cost for particular business entity and restrictions imposed by parent law of the entity.
1. Proprietary Firm-Self Employed
2. Hindu Undivided Family-HUF
3. Partnership Firm
4. Association of Persons (AOPs)
5. Co Operative Society
6. Limited Liability Partnership (LLP):
7. Private Limited Company (Pvt. Ltd. Co)
8. Public Limited Company (Company)
9. Liaison Office
Person can initially begin their activity with a simple entity which has very limited paper work, simple to operate, minimal compliances and easy to upgrade to higher level when ever need arise. If it is one person venture, best way is to start as Proprietary Firm. If there is more than 1 person, begin with Partnership Firm.
Basic requirements for any Entity:
1) Shops Establishment License from Municipality
2) PAN Number
3) TAN (for TDS Deductions & payments)
4) GST (Minimum Turnover Rs.40 lakh)
5) Professional Tax is a kind of tax charged by various State Governments. The tax is charged on the income earned by individuals who are engaged in various businesses & professions and to be paid by business entity as well as deducted from Employee`s monthly salary as per slabs.
6) Labour Laws Applicability: Over 20 Employees
7) Maintenance of Books: As per Income Tax, If Total Receipts exceeds RS. 25 Lakh in a year
8) Bank Account-Bank would ask for PAN & Registration Document.
9) Chartered Accountant Certificate to open Bank Current Account is desired by many Banks.
PAN is a code that acts as an identification for individuals, families and corporate (Indian and Foreign as well), especially those who pay Income Tax.
PAN is a unique, 10-character alpha-numeric identifier, issued to all judicial entities and it also serves as an important proof of identification. The PAN is mandatory for a majority of financial transactions such as opening a bank account, receiving taxable salary or professional fees, sale or purchase of assets above specified limits etc.; especially high-value transactions. The primary purpose of the PAN is to bring a universal identification to all financial transactions and to prevent tax evasion by keeping track of monetary transactions, especially those of high-net-worth individuals who can impact the economy.
One can apply for PAN by submitting the prescribed PAN application to the authorized PAN agency of the district or through online submission to NSDL Website, UTI along with 2 recent passport size color photographs, proof of ID, Address and Date of Birth and fee. In case of Re-print (re-issue), a photocopy of the old PAN is also required. It takes about 10–15 days to receive the card.
User with Aadhaar Card can also submit e-KYC.
Books of Accounts, Records & Audit
Books of accounts including vouchers and receipts are required to be maintained under different statutory laws – Income Tax Act, Companies Act 2013 (applicable to Companies) & GST Act.
If the sale/turnover/gross receipts from the business or profession is more than Rs. 25 lakhs or the income from business or profession is more than Rs. 2,50,000 in any of the 3 earlier years, then books of accounts will be compulsorily required to be maintained.
Books of accounts, Statements & Records to be maintained
1) Cash Book
4) Copies of bills or receipts
5) Daily cash register with details of patients, services rendered, fees received and date of receipt (persons carrying on medical profession)
6) Cash flow statement
7) Records of sales and purchases,
8) Records of assets and liabilities
9) Fixed Assets Register
10) Deeds, vouchers, writing, documents, minutes, and registers whether in physical or electronic mode
Under GST Act
Every registered person has to maintain GST records at the principal place of business.
Records to be maintained
· Production or manufacture of goods
· Inward and outward supply of goods or services or both
· Stock of goods
· Input tax credit availed
· Output tax payable and paid and
· Other particulars as may be prescribed
Advise: It is best to buy official software package from popular provider like Tally to maintain your Books of Accounts, Records, Statements and other statutory compliances as these Software complies with all the requirements. You may like customize this to suit your day to day operational needs like Invoicing, Receipts, Purchase Orders etc. and sharing them electronically with your customers and suppliers. They would also provide statutory compliances for GST, TDS etc. This software prepares Financial Statements for Audit and filing with Tax Authorities. Software could cost Rs.50, 000/- and customization can also cost similar amount but take 1-2 year AMC till your operations stabilizes.
Presumptive Business Income
You can opt for presumptive Taxation if your Business Turnover is below Rs.2 cr (increased to Rs.10 cr if cash turnover is less than 5%). Then presumptive Income is 6% for turnover generated by collecting sales via Cheque or inward bank transfer. As regards cash business turnover, presumptive income would be 8%.
If, your turnover is below limits set in presumptive taxation, you may like to begin by not having Books (if not required to track your transactions, Bank Balances, Stock Level, Outstanding (Debtors or Creditors), then you can avoid Software and Accountant by doing following:
ü Have to get regular (monthly, quarterly & annual) Bank Statement in Excel format.
ü Have separate Bank Accounts for your personal transactions and separate for your Business and thus you can track Business transactions by analyzing only Receipt/Deposit side Transactions and assess your Income/Turnover.
ü Analyse Payment side transactions for TDS Compliances regarding those liable for TDS Compliances. Your Purchases or expenses are not relevant as you would be offering % of Income/Turnover as Taxable Profits.
Tax Audit [u/s 44AB (d)]
If your Income or turnover is more than indicated above, then you need to get your Accounts audited by CA.
You also need to get Accounts audited if your Net Income is below % specified in Presumptive taxation or you have a loss.
Benefits are available to small companies
Income Tax Rates
Corporate tax rate for companies with turnover less than Rs. 400 Crores is 25%. The corporate tax rate is 30% for companies with turnover above Rs. 400 Crores.
Domestic Manufacturing Company - Not claiming exemptions (income taxable u/s 115BAA)
Income Tax @ 22% of Taxable Income
Plus: Surcharge @ 10% & Health and Education Cess @4%,
Domestic Manufacturing Company (Incorporated after 1 October, 2019)) - New Company [income taxable u/s 115BAB]
Income Tax @ 15% of Taxable Income
Plus: Surcharge @ 10% & Health and Education Cess @4%,
Ease of Doing Business for MSMEs: The finance ministry of India has been trying to take some good steps in taxation that can facilitate the growth of MSMEs in India. The impact of the taxation system on MSMEs is twin layered- through the corporate taxation system and the GST.
The most significant change that impacted the whole idea of small and medium enterprises in recent times was the change in its definition. Earlier, the entities with investment up to Rs 10 crore were medium enterprises, for services the limit was 5 crore.
However, now MSMEs are enterprises with investment up to Rs 20 crore and turnover less than Rs 100 crore. This has expanded the overall base, thereby, allowing a larger number of entities to have access to the taxation benefits available to the MSMEs. Some ways in which the current taxation system is expected to boost MSMEs are:
Relief from tax audit: Earlier an enterprise was required to go through tax audit when the turnover crossed Rs 1 crore. This limit has now been pushed to Rs 10 Crore provided cash transactions do not exceed 5 % of total transactions. This has made tax compliance simpler for a wider number of MSMEs thereby allowing them to focus on growth.
Goods and Service Tax: Several changes have been made in the indirect tax system to improve compliance. Simplification of GST returns Aadhaar-based verification of taxpayers, electronic invoicing to facilitate compliance, etc. has made GST compliance multi fold easier for MSMEs.
GST Council hiked the threshold turnover for the composition scheme from Rs. 75 lakh to Rs. 1 crore. The scheme allows SMEs to pay 1-5% tax without going through the cumbersome and tedious formalities. With the Government easing the processing of filing for SMEs with a turnover of Rs. 1.5 crore from monthly to quarterly, it would provide the much-needed relief to the sector.
As per the CGST (Amendment) Act, 2018, a composition dealer can also supply services to an extent of ten percent of turnover, or Rs.5 lakhs, whichever is higher.
Who cannot opt for Composition Scheme?
The following people cannot opt for the scheme-
· Manufacturer of ice cream, pan masala, or tobacco
· A person making inter-state supplies
· A casual taxable person or a non-resident taxable person
· Businesses which supply goods through an e-commerce operator
Conditions for availing Composition Scheme
The following conditions must be satisfied in order to opt for composition scheme:
Ø No Input Tax Credit can be claimed by a dealer opting for composition scheme
Ø The dealer cannot supply goods not taxable under GST such as alcohol as alcohol is covered under VAT
Ø The taxpayer has to pay tax at normal rates for transactions under the Reverse Charge Mechanism
Ø If a taxable person has different segments of businesses (such as textile, electronic accessories, groceries, etc.) under the same PAN, they must register all such businesses under the scheme collectively or opt out of the scheme.
Ø The taxpayer has to mention the words ‘composition taxable person’ on every notice or signboard displayed prominently at their place of business.
Ø The taxpayer has to mention the words ‘composition taxable person’ on every bill of supply issued by him.
Ø As per the CGST (Amendment) Act, 2018, a manufacturer or trader can now also supply services to an extent of ten percent of turnover, or Rs.5 lakhs, whichever is higher. This amendment will be applicable from the 1st of Feb, 2019.
Tax holiday expansion for start-ups: Startups having turnover up to Rs 25 crores had the tax benefit of getting 100 % of profits as a deduction for three consecutive years. This has gone through a major change. The limit of Rs 25 crore has been raised to Rs 100 crore making it available to some bigger startups too. Moreover, the benefit has been extended to be allowed for three out of the first 10 years instead of the first seven years. These shreds off the tax burden for several new startups and pushing them to stay longer and run faster in the race.
Considering the fact that we majorly depend on MSMEs for employment, exports, and GDP contribution, the finance ministry is striving to facilitate their exponential growth and expansion. However, there are could be some challenges being faced by MSMEs because of the Indian taxation system. Most of it is being carefully monitored by the ministry, evaluated, and being responded to, through the financial policies and legal amendments.